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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, 20142016

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: 001‑35916


PennyMac Financial Services, Inc.

(Exact name of registrant as specified in its charter)


Delaware

(State or other jurisdiction of
incorporation or organization)

80‑0882793

(IRS Employer
Identification No.)

6101 Condor Drive, Moorpark,3043 Townsgate Road, Westlake Village, California

(Address of principal executive offices)

9302191361

(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

Name of Each Exchange on Which Registered

Class A Common Stock of Beneficial Interest, $0.0001 Par Value

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒  No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. ☒

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

Large accelerated filer ☐

Accelerated filer ☒

Non‑accelerated filer ☐
(Do not check if a
smaller reporting company)

Smaller reporting company ☐

 

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, 20142016 the aggregate market value of the registrant’s Common Stock of beneficial interest, $0.0001 par value (“common stock”), held by non‑affiliates was $332,013,936$237,657,297 based on the closing price as reported on the New York Stock Exchange on that date.

As of March 10, 2015,7, 2017, the number of outstanding shares of common stock of the registrant was 21,613,017.22,738,618.

Documents Incorporated by Reference

Document

Parts Into Which Incorporated

Definitive Proxy Statement for
20152016 Annual Meeting of Stockholders

Part III

 

 

 

 


 


Table of Contents

PENNYMAC FINANCIAL SERVICES, INC.

FORM 10‑K

December 31, 20142016

TABLE OF CONTENTS

 

 

    

 

    

Page

 

 

Special Note Regarding Forward‑Looking Statements

 

3

PART I 

 

 

 

 

Item 1 

 

Business

 

5

Item 1A 

 

Risk Factors

 

11

Item 1B 

 

Unresolved Staff Comments

 

41

Item 2 

 

Properties

 

41

Item 3 

 

Legal Proceedings

 

41

Item 4 

 

Mine Safety Disclosures

 

42

PART II 

 

 

 

 

Item 5 

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

43

Item 6 

 

Selected Financial Data

 

44

45 

Item 7 

 

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

 

46

Item 7A 

 

Quantitative and Qualitative Disclosures About Market Risk

 

66

72 

Item 8 

 

Financial Statements and Supplementary Data

 

69

75 

Item 9 

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

69

75 

Item 9A 

 

Controls and Procedures

 

69

75 

Item 9B 

 

Other Information

 

70

78 

PART III 

 

 

 

 

Item 10 

 

Directors, Executive Officers and Corporate Governance

 

71

79 

Item 11 

 

Executive Compensation

 

71

79 

Item 12 

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

71

79 

Item 13 

 

Certain Relationships and Related Transactions, and Director Independence

 

71

79 

Item 14 

 

Principal Accounting Fees and Services

 

71

79 

PART IV 

 

 

 

 

Item 15 

 

Exhibits and Financial Statement Schedules

 

80 

72Item 16

Form 10-K Summary

92 

 

 

Signatures

 

93 

814

 

 

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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 creation ofmortgage lending and servicing-related regulations promulgated by the Consumer Financial Protection Bureau (“CFPB”), and its rules and the enforcement thereof by the CFPB;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;

·

foreclosure delays and changes in foreclosure practices;

·

certain banking regulations that may limit our business activities;

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·

our dependence on the multi-family and commercial real estate sectors for future originations and investments in commercial mortgage loans and other commercial real estate related loans;

·

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

·

difficulties inherent in growing loan production volume;

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·

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

·

purchase opportunities for mortgage servicing rights (“MSRs”)any required additional capital and our success in winning bids;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 dependence on the success of the small balance multifamily market for future originations of commercial mortgage loans and other commercial real estate-related loans;

·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

the effect of public opinion on our reputation;

·

our recent growth;

·

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

·

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

·

our ability to detect misconduct and fraud; and

·

our ability to mitigate cybersecurity risks and cyber incidents.

 

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.

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PART I

 

Item 1.  Business

 

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. (“PFSI”).

 

Initial Public Offering and Recapitalization

On May 14, 2013, we completed an initial public offering (“IPO”) in which we sold approximately 12.8 million shares of Class A Common Stock par value $0.0001 per share (“Class A Common Stock”) for cash consideration of $16.875 per share (net of underwriting discounts). With the net proceeds from the IPO, we bought approximately 12.8 million Class A units of Private National Mortgage Acceptance Company, LLC (“PennyMac”) and became its sole managing member. We operate and control all of the business and affairs and consolidate the financial results of PennyMac.

Before the completion of the IPO, the limited liability company agreement of PennyMac was amended and restated to, among other things, change its capital structure by converting the different classes of interests held by its existing unitholders into Class A units. PennyMac and its existing unitholders also entered into an exchange agreement under which (subject to the terms of the exchange agreement) they have the right to exchange their Class A units for shares of our Class A Common Stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends, reclassifications and certain other transactions.

PennyMac has made an election pursuant to Section 754 of the Internal Revenue Code which remains in effect. As a result of this election, an exchange of Class A units for shares of our Class A Common Stock pursuant to the exchange agreement results in a special adjustment for PFSI that may increase PFSI’s tax basis in certain assets of PennyMac that otherwise would not have been available. These increases in tax basis may reduce the amount of income tax that PFSI would otherwise be required to pay in the future and result in increases in investment in PennyMac deferred tax assets net of the related deferred tax liabilities.

As part of the IPO, we entered into a tax receivable agreement with the then-existing unitholders of PennyMac that provides for payment to such owners of 85% of the tax benefits, if any, that we are deemed to realize under certain circumstances as a result of (i) increases in tax basis resulting from exchanges of Class A units and (ii) certain other tax benefits related to our tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.

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 were formed as a corporation in December 2012. On May 14, 2013, we completed an initial public offering (“IPO”) in which we sold approximately 12.8 million shares of Class A Common Stock par value $0.0001 per share (“Class A Common Stock”) for cash consideration. With the net proceeds from the IPO, we bought approximately 12.8 million Class A units of Private National Mortgage Acceptance Company, LLC (“PennyMac”) and became its sole managing member. We operate and control all of the business and affairs and consolidate the financial results of 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”).

 

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We conduct our business in three segments: loan production, loan servicing (together, these two activities comprise mortgage banking)banking activities) and investment management. 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”). It is also an approved issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”), a lender of the Federal Housing Administration (“FHA”), a lender/servicer of the Veterans Administration (“VA”) and the U.S. Department of Agriculture (“USDA”), and a servicer for the Home Affordable Modification Program (“HAMP”). 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 principal investment management subsidiary, PNMAC Capital Management, LLC (“PCM”), isa Delaware limited liability company registered with the Securities and Exchange Commission (“SEC”) as an SEC registered investment adviser. PCMadviser under the Investment Advisers Act of 1940, as amended, manages PMT,PennyMac Mortgage Investment Trust (“PMT”), a mortgage real estate investment trust, listed on the New York Stock Exchange under the ticker symbol PMT. PCM also manages PNMAC Mortgage Opportunity Fund, LLC and PNMAC Mortgage Opportunity Fund, LP, both registered under the Investment Company Act of 1940 (“Investment Company Act”), as amended, an affiliate of these Funds and PNMAC Mortgage Opportunity Fund Investors, LLC. We refer to these funds collectively as our “Investment Funds” and, together with PMT, as our “Advised Entities.”

 

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Mortgage Banking

 

Loan Production

 

Our loan production segment is sourcedsources mortgage loans through two channels: correspondent production and consumer direct lending.

 

In correspondent production we manage, on behalf of PMT and for our own account, the acquisition of newly originated, prime credit quality, first-lien residential mortgage loans that have been underwritten to investor guidelines. PMT acquires, from approved correspondent sellers, newly originated mortgage loans, including both conventional and government-insured or guaranteed residential mortgage loans that qualify for inclusion in securitizations that are guaranteed by the Agencies. 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 and fulfill them for our own account.fee.

 

Through our consumer direct lending channel, we originate new prime credit quality, first-lien residential conventional and government-insured or guaranteed mortgage loans on a national basis to allow customers to purchase or refinance their homes. The 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 and have been developing our consumer direct operations with call centers strategically positioned across the United States.

 

For mortgage loans originated viathrough our consumer direct lending channel, we conduct our own fulfillment, earn interest income and gains or losses during the holding period and upon the sale or securitization of these loans, and retain the associated MSRs (subject to sharing with PMT a portion of such MSRs or cash with respect to certain consumer direct originated mortgage loans that refinance mortgage loans for which the related MSRs or excess servicing spread (“ESS”) was held by PMT).

 

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Our loan production activity is summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

    

2014

    

2013

    

2012

 

 

 

(in thousands)

 

Fair value of mortgage loans purchased and originated for sale:

 

 

                      

 

 

                      

 

 

                      

 

Government-insured or guaranteed loans acquired from PennyMac Mortgage Investment Trust

 

$

16,431,338 

 

$

16,113,806 

 

$

8,864,264 

 

Consumer direct

 

 

1,952,505 

 

 

1,104,051 

 

 

539,160 

 

 

 

$

18,383,843 

 

$

17,217,857 

 

$

9,403,424 

 

Fair value of mortgage loans fulfilled for PennyMac Mortgage Investment Trust

 

$

11,858,198 

 

$

15,941,369 

 

$

13,473,916 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

 

2016

    

2015

    

2014

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance of mortgage loans purchased and originated for sale:

 

 

                      

 

 

                      

 

 

                      

 

Government-insured or guaranteed mortgage loans acquired from PennyMac Mortgage Investment Trust

 

$

39,908,163

 

$

31,490,920

 

$

16,431,338

 

Mortgage loans sourced through our consumer direct channel

 

 

6,491,107

 

 

4,143,239

 

 

1,952,505

 

 

 

$

46,399,270

 

$

35,634,159

 

$

18,383,843

 

Unpaid principal balance of mortgage loans fulfilled for PennyMac Mortgage Investment Trust

 

$

23,188,386

 

$

14,014,603

 

$

11,476,448

 

 

Loan Servicing

 

Our loan servicing segment performs loan administration, collection, and default management activities, including the collection and remittance of loan payments; response to customer inquiries; accounting for principal and interest; holding custodial (impounded) funds for the payment of property taxes and insurance premiums; counseling delinquent mortgagors; and supervising foreclosures and property dispositions. We service a diverse portfolio of mortgage loans both as the owner of MSRs and on behalf of other MSR or mortgage owners. We provide servicing for conventional and government-insured or guaranteed loans (“prime servicing”), as well as servicing for distressed mortgage loans that have been acquired as investments by our Advised Entities (“special servicing”). As of December 31, 2014,2016, the portfolio of mortgage loans that we serviced or subserviced totaled approximately $106.0$194.2 billion in unpaid principal balance (“UPB”).

 

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Investment Management

 

We are an investment manager through our subsidiary, PCM. PCM currently manages PMT and the Investment Funds. PMT and the Investment Funds had combined net assets of approximately $2.0$1.5 billion as of December 31, 2014.2016. For these activities, we earn management fees as a percentage of net assets and may earn incentive compensation based on investment performance.

 

U.S. Mortgage Market

 

The U.S. residential mortgage market is one of the largest financial markets in the world, with approximately $10 trillion of outstanding debt and average annual origination volume of $1.6$1.8 trillion for the five years ending December 31, 2014. Dislocations from the financial crisis have led many2016. Many of the largest financial institutions, including banks which have traditionally held the majority of the market share in mortgage originations and servicing, to reducehave reduced their participation in the mortgage market through asset sales and by exiting businesses, and the industry remains in a period of significant transformation, creating opportunities for non-bank participants.

 

The residential mortgage industry is characterized by high barriers to entry, including the necessity for approvals required to sell loans to and service loans for the Agencies, state licensing requirements for non-banks without a federal charter,non-federally chartered banks, sophisticated infrastructure, technology, and processes required for successful operations, and financial capital requirements.

 

Our Growth Strategies

 

Since our establishment, during the financial crisis, we have demonstrated our ability to apply our residential mortgage expertise and operating capabilities to multiple business opportunities. In the initial years of our operation, for example, we identified investing in distressed investingmortgage assets as an attractive opportunity and we raised and deployed capital through a series of successful transactions. As the mortgage market presented opportunities in new loan production and servicing, we expanded our management and capabilities to profitably capitalize on these businesses as well.

 

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Our growth strategies include:

 

Growing our Mortgage Loan Servicing Portfolio Organically and through Opportunistic Acquisitions

 

We expect to grow our servicing portfolio on an organic basis, as our correspondent government‑insured production and consumer direct lending addsadd new prime servicing for owned MSRs, and correspondent conventional lendingproduction adds new subservicing. In 2014,2016, our correspondent and consumer direct loan production totaled $17.6$69.7 billion in UPB. We plan to supplement our organic growth by adding new special servicing through continued distressed loanwith MSR acquisitions, by PMT and potentially other entities thatsome of which may be concentrated in delinquent or defaulted loans for which we may managehave expertise in the future.servicing. We also plan to acquirehave acquired MSRs from large mortgage servicers, which are selling MSRs due to continuing operational and regulatory pressures, higher regulatory capital requirements for banks, and a re-focus on core customers and business, and from independent mortgage banks, which are selling MSRs due to reduced origination volumes, operational losses, and a need for capital.  During 2014,2016, we completed acquisitionsthe acquisition from a large bank of approximately $1 billion in UPB of MSRs with UPB totaling $11.9 billion. We effected these acquisitions through a co‑investment with PMT by which we financed a portion of these purchases through the salerelated to PMT of ESS.defaulted government-insured loans.

 

Growing Correspondent Production through Expanding Seller Relationships

 

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 existing sellers as we continue to add to the loan products thatand services we offer, and deepen our participation in certain geographic markets in the United States. Over the past fewseveral 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 take 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.

 

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Growing Consumer Direct Lending through Portfolio Refinance and Non‑Portfolio Originations

 

We expect to grow our consumer direct lending business by leveraging our growing servicing portfolio through refinance activitiesand purchase-money loans for existing customers 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 refinancingorigination activity through our consumer direct business. 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.

 

Entering Commercial Real Estate Finance Focused on Small Balance LoansExpansion into new markets

 

We regularly evaluate opportunities to grow our business, including expansion into new markets, such as the wholesale lending channel and non-delegated correspondent lending services. The wholesale lending channel involves the underwriting and funding of mortgage loans sourced by mortgage loan brokers and other financial intermediaries. We estimate that the wholesale lending channel represents approximately 10% of U.S. residential mortgage originations and we are enteringcurrently in the process of developing the systems and processes to enter that market. In 2016, we launched a non-delegated correspondent service to complement our delegated correspondent channel. The non-delegated correspondent lending service involves the purchase by PMT of loans for which PLS has provided underwriting eligibility services to the originating correspondent seller.  Entry into this market leverages our existing loan fulfillment infrastructure, gives our existing sellers an additional method through which they can deliver loans to us and provides us with access to new sellers that were not previously served. In 2015, we entered the commercial real estate finance business, by focusingwith a focus on the production of small balance commercialmultifamily loans (typically under $10 million in UPB).  We are investing in personnel, systems and marketing to build our commercial real estate finance platform, which we believe complements our existing businesses in residential mortgages.  In addition to loan production, PLS is expected to provide special servicing for nonperforming and sub-performing commercial loans which may be acquired by PMT for investment purposes.

 

Compliance and Regulatory

 

Our business is subject to extensive federal, state and local regulation. Our loan production and loan servicing operations are primarily regulated at the state level by state licensing authorities and administrative agencies, with additional oversight from the CFPB. 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

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examinations by federal and state regulatory agencies. We incur significant ongoing costs to comply with these licensing and examination requirements.

 

While the U.S. federal government does not primarily regulate loan production, the federal 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, a minimum of 20 hours of pre‑licensing education, an annual minimum of eight hours of continuing education and the successful completion of both national and state exams.

 

In addition to licensing requirements, we must comply with a number of federal consumer protection laws, including, among others:

·

the Servicemembers Civil Relief Act, which provides, among other things, interest and foreclosure protections for service members on active duty;

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·

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 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 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 Fair Credit Reporting Act and Regulation V thereunder, which regulate the use and reporting of information related to the credit history of consumers;

·

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 Homeowners Protection Act, which requires the cancellation of private mortgage insurance once certain equity levels are reached, sets disclosure and notification requirements, and requires the return of unearned premiums;

·

the Home Mortgage Disclosure Act and Regulation C thereunder, which require financial institutions to report certain public loan data;

·

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; and

·

the Fair Housing Act, which prohibits discrimination in housing on the basis of race, sex, national origin, and certain other characteristics.

 

Many of these laws are further impacted by the SAFE Act and implementation of new rules by the CFPB under the Dodd‑Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”).

 

We are committed to complying with all applicable laws, regulations and contractual agreements. We believe that compliance is best managed by integrating responsibility within each department’s activities to promote management and employee accountability. Accordingly, we have implemented a matrixed approach to the integration of

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our compliance program that utilizes expertise within the organization and defines clear responsibilities for the program; specifically, business units are responsible for defining and managing compliance performance through process‑based controls, risk remediation and reporting. Centralized monitoring and independent review, control testing, validation and regulation interpretation is performed by our Corporate Compliance, Legal, Quality Control, Corporate Compliance, Enterprise Risk Management and Internal Audit and Legal groups.

 

We have established a management Mortgage Regulatory Compliance Committee (“MRCC”) to oversee the compliance program, engender a culture conducive to ethical conduct and compliance throughout theour Company, assure that we proactively identify and respond to changes in our risk profile and regulatory environment, and establish compliance program standards, articulated in compliance policies. The MRCC has identified individuals throughout the organization to oversee specific areas of compliance. MRCC membership includes senior management from across the Company and meets monthly to remain updated on recurring and rotational topics.

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We administer a compliance training program comprised of general training and role-centric training. Both are designed to promote a contemporary understanding of compliance issues and regulations affecting the mortgage industry.

 

During 2014,2016, our loan origination and servicing operations were reviewed by Fannie Mae, Freddie Mac, Ginnie Mae, FHA, the FDIC and by other state and federal regulators. There were no significant findings or allegations of violations of law from any of these reviews.

 

Intellectual Property

 

We hold registered 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. We do not otherwise rely on any copyright, patent or other form of registration to protect our rights in our intellectual property. Our other intellectual property includes proprietary know‑how and technological innovations, such as our proprietary loan‑level analytics “LENESM” (Loan Enhancement Normalization Engine)systems and models for distressed loan management, 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.

 

In our mortgage banking segment,segments, we compete with large financial institutions and with other independent residential mortgage loan producers and servicers, such as Wells Fargo, JP Morgan Chase, Bank of America, Citigroup, U.S. Bank, Quicken Loans and Nationstar Mortgage, Ocwen Financial Corporation and Walter Investment Management Corp.Mortgage. In our correspondentloan production and consumer direct businesses,segment, we compete on the basis of product offerings, technical knowledge, manufacturing quality, speed of execution, rate and fees. In our servicing business,segment, we compete on the basis of experience in the residential loan servicing business, quality of high‑touch special servicing and historical servicing performance, and quality of execution, especially in high‑touch special servicing.

 

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, 2014,2016, we, through a subsidiary, had 1,816 employees, all3,038 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 United States Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a) or 15(d) of whomthe Securities Exchange Act of 1934, as amended, are based inavailable free of charge at www.pennymacfinancial.com through the United States. Noneinvestor relations section of our employees is representedwebsite 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. In addition, the public may read and copy the materials we file with the SEC at the SEC's Public Reference Room at 100 F. Street, NE, Washington, D.C. 20549. Information regarding the operation of the Public Reference Room may be obtained by a labor unioncalling the SEC at 1-800-SEC-0330. The above references to our website and we consider our employee relations tothe SEC’s website do not constitute incorporation by reference of the information contained on those websites and should not be good.considered part of this document.

 

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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 or results of operations in future periods. The risks described below are not the only risks that we face. Additional risks not currentlypresently known to us or that we currently deem to be immaterial may also may materially adversely affect our business, financial condition or 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 and results of operations.

 

Due to the highly regulated nature of the mortgage industry, weWe are required to comply with a wide array of federal, state and local laws and regulations that regulate, among other things, the manner in which we conduct our loan production and servicing businesses and the fees that we may charge.businesses. These regulations directly impact our business and require constant compliance, monitoring and internal and external audits. 

Federal, state and local governments have recently proposed or enacted numerous new laws, regulations and rules related to mortgage loans. Laws, regulations, rules and judicial and administrative decisions relating to mortgage loans include those pertaining to real estate settlement procedures, equal credit opportunity, fair lending, fair credit reporting, truth in lending, fair debt collection practices, service members protections, compliance with net worth and financial statement delivery requirements, compliance with federal and state disclosure and licensing requirements, the establishment of maximum interest rates, finance charges and other charges, qualified mortgages, licensing of loan officers and other personnel, loan officer compensation, secured transactions, property valuations, servicing transfers, payment processing, escrow, communications with consumers, loss mitigation, collection, foreclosure, bankruptcy, repossession and claims‑handling procedures, and other trade practices and privacy regulations providing for the use and safeguarding of non‑public personal financial information of borrowers. Service providers we use must also comply with some of these legal requirements, including outside foreclosure counsel retained to process foreclosures.

In particular, the Dodd‑Frank Act represents a comprehensive overhaul of the financial services industry in the United Statesforeclosures and includes, among other things (i) the creation of a Financial Stability Oversight Council to identify emerging systemic risks posed by financial firms, activities and practices, and to improve cooperation among federal agencies, (ii) the creation of the CFPB, authorized to promulgate and enforce consumer protection regulations relating to financial products and services, including residential mortgage lending and servicing, (iii) the establishment of strengthened capital and prudential standards for banks and bank holding companies, (iv) enhanced regulation of financial markets, including the derivatives and securitization markets, and (v) amendments to the TILA and RESPA, aimed at improving consumer protections with respect to residential mortgage originations, including disclosures, originator compensation, minimum repayment standards, prepayment considerations appraisals and servicing requirements.bankruptcies.

 

Our failure to complyoperate effectively and in compliance with any of these laws, or 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 and results of operations. In addition, our failure to comply with these laws, regulations and rules may result in increased costs of doing business, reduced payments by borrowers, modification of the original terms of mortgage loans, permanent forgiveness of debt, delays in the foreclosure process, increased servicing advances, litigation, reputational damage, enforcement actions, and repurchase and indemnification obligations. Our failure to adequately supervise service providers, including outside foreclosure counsel, may also have these negative results.

 

The failure of the mortgage lenders from whom loans were acquired through our correspondent production programactivities to comply with theseany applicable laws, regulations and rules may also result in these adverse consequences. We have in place a due diligence program designed to assess areas of risk with respect to these acquired loans, including, without limitation, compliance with underwriting guidelines and applicable law. However, we may not detect every violation of law by these mortgage lenders. Further, to the extent any other third party originators or servicers with whom we do business fail to comply with applicable law and any of their mortgage loans or MSRs become part of our assets, it could subject us, as an assignee or purchaser of the related mortgage loans or MSRs, to monetary penalties or other losses. In general, if any of our loans are found to have been originated, serviced or owned by us or a third party in violation of applicable law, we could be subject to lawsuits or governmental actions, or we could be fined or incur losses. While we have may contractual rights to seek indemnity or repurchase from these

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correspondentthese lenders and third party originators and servicers, if any of these lendersthem are unable to fulfill their indemnity or repurchase obligations to us to a material extent, our business, financial condition and results of operations could be materially and adversely affected. In addition,

The outcome of the 2016 U.S. presidential and congressional elections could result in significant policy changes or regulatory uncertainty in our repurchase agreements that provide us with capitalindustry. While it is not possible to purchase loans forpredict when and whether significant policy or

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regulatory changes would occur, any such changes on the federal, state or local level could significantly impact, among other things, our correspondent production business require us to make representationsoperating expenses, the availability of mortgage financing, interest rates, consumer spending, the economy and the geopolitical landscape. To the extent that the loans sold under these agreements comply with applicable law. See “Market Risks—We leveragenew government administration takes action by proposing and/or passing regulatory policies that could have a negative impact on our assets, whichindustry, such actions may materially and adversely affect our financial condition and results of operations”have a material adverse effect on page 52 for a discussion of risks related to breaches of such representations.

In addition, although they have not yet been enacted, the Federal Housing Finance Agency (“FHFA”) proposed changes to mortgage servicing compensation structures in 2011 for servicing with the GSEs, including reducing servicing fees and channeling funds toward reserve accounts for delinquent loans. Also, there continue to be changes in legislation, rulemaking and licensing in an effort to simplify the consumer mortgage experience which requires technology changes and additional implementation costs for loan originators and servicers. We expect that legislative and regulatory changes will continue in the foreseeable future, which may increase our operating expenses.

Any of these or other changes in laws or regulations could adversely affect our business, financial condition and results of operations.

 

The CFPB continues to be moreis active in its monitoring of the residential mortgage origination and servicing sectors. New rules and regulations and/orand more stringent enforcement of existing rules and regulations by the CFPB could result in enforcement actions, fines, penalties and the inherent reputational risk that results from such actions.

 

The CFPB officially began operation on July 21, 2011. TheUnder the Dodd-Frank Act, the CFPB is charged, in part,empowered with enforcingbroad supervision, rulemaking and examination authority to enforce laws involving consumer financial products and services and is empowered with examination, enforcementto ensure, among other things, that consumers receive clear and rulemaking authority.accurate disclosures regarding financial products and are protected from hidden fees and unfair, deceptive or abusive acts or practices. The CFPB has takenadopted a very active role. For example, the CFPB issued a Supervision and Examination Manual and other guidelines indicating that it would send examiners to banks and other institutions that service and/or originate mortgages to assess whether consumers’ interests are protected.

Finalnumber of final regulations under the Dodd-Frank Act regarding truth in lending, “ability to repay” and other standards and practices were adopted by the CFPB and became effective in January 2014. Before originating arepay,” home mortgage loan a lender must determine, on the basis of certain informationdisclosure, home loan origination, fair credit reporting, fair debt collection practices, foreclosure protections, and according to specified criteria, that the prospective borrower has the ability to repay the loan. Lenders that issue loans meeting certain heightened underwriting requirements will be presumed to comply with the new rule with respect to these loans.

The CFPB issued final rules that took effect on January 10, 2014 amending Regulation X, which implements RESPA, and Regulation Z, which implements TILA. These final rules implement provisions of the Dodd-Frank Act regarding mortgage loan servicing including periodic billing statements, certain notices and acknowledgements, prompt crediting of borrowers’ accounts for payments received, additional notice, review and timing requirements with respect to delinquent borrowers, prompt investigation of complaints by borrowers and required additional steps to be taken before purchasing insurance to protect the lender’s interest in the property. On December 15, 2014, the CFPB proposed amendments to the servicing rules, involving lender-placed insurance notices, delinquency andincluding provisions regarding loss mitigation, early intervention, loss mitigation, periodperiodic statement requirements and successors-in-interest to borrowers. Comments to the proposed rules must be received by March 16, 2015.

On August  19, 2014,lender-placed insurance.  In October 2016, the CFPB issued guidance to mortgage servicers to address potential risks to customers that may arise in connection with transfers of servicing. According to the CFPB, if a servicer is determined to have engaged in any acts or practices that are unfair, deceptive, or abusive, or that otherwise violate federal consumer financial laws and regulations, the CFPB will take appropriate supervisory and enforcement actions to address violations and seek all appropriate corrective measures, including remediation of harm to consumers. In light of the significant amount of transfers that we have undertaken and seek to undertake, we may receive additional scrutiny from the CFPB and such scrutiny may result in some or all of the types of actions described above being imposed upon our business.

On December 15, 2014, the CFPB proposed further amendments to the Regulationrevised its rules under Regulations X and Regulation Z servicing rules relating to force-placedimpacting lender-placed insurance notices, delinquency and early intervention, loss mitigation, periodic statement requirements, and successors-in-interest to borrowers.

 

The CFPB also has enforcement authority with respect to the conduct of third-party service providers of financial institutions. The CFPB has made it clear that it expects non-bank entities to maintain an effective process for managing risks associated with third-party vendor relationships, including compliance-related risks. In connection with this vendor risk management process, we are expected to perform due diligence reviews of potential vendors, review vendors’ policies and procedures and internal training materials to confirm compliance-related focus, include enforceable consequences in contracts with vendors regarding failure to comply with consumer protection requirements, and take prompt action, including terminating the relationship, in the event that vendors fail to meet our expectations. The CFPB is also applying greater scrutiny to compensation payments to third-party providers for marketing services and may issue guidance that narrows the range of acceptable payments to third-party providers as part of marketing services agreements, lead generation agreements and other third-party marketer relationships.

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TableIn addition to its supervision and examination authority, the CFPB is authorized to conduct investigations to determine whether any person is engaging in, or has engaged in, conduct that violates federal consumer financial protection laws, and to initiate enforcement actions for such violations, regardless of Contentsits direct supervisory authority. Investigations may be conducted jointly with other regulators.  Investigations may be conducted jointly with other regulators. In furtherance of its supervision and examination powers, the CFPB has the authority to impose monetary penalties for violations of applicable federal consumer financial laws, require remediation of practices and pursue administrative proceedings or litigation for violations of applicable federal consumer financial laws. The CFPB also has the authority to obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief) and monetary penalties ranging from $5,000 per day for ordinary violations of federal consumer financial laws to $25,000 per day for reckless violations and $1 million per day for knowing violations.

Regulations

Rules and regulations promulgated under the Dodd-Frank Act or by the CFPB, changes in leadership or authority levels within the CFPB, and actions taken or not taken by the CFPB could materially and adversely affect the manner in which we or PLS conduct our or PLS’ business, result in heightened federal and state regulation and oversight of our or PLS’ business activities, and in increased costs and potential litigation associated with our or PLS’ business activities.

Our or PLS’ failure to comply with the laws, rules or regulations to which we are subject, whether actual or alleged, would expose us or PLS to fines, penalties or potential litigation liabilities, including costs, settlements and judgments, any of which could have a material adverse effect on our or PLS’ business, financial position,condition or results of operations or cash flows and our ability to make

distributions to our shareholders.operations.

 

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We are highly dependent on U.S. government‑sponsored entities and government agencies, and any changes in these entities or their current roles could materially and adversely affect our business, liquidity, financial positioncondition and results of operations.

 

Our ability to generate revenues through mortgage loan sales depends to a significant degree on programs administered by GSEs, such as Fannie Mae and Freddie Mac, government agencies, including Ginnie Mae, and others that facilitate the issuance of mortgage‑backed securities (“MBS”), in the secondary market. These Agencies play a critical role in the mortgage industry and we have significant business relationships with many of them. Presently, almost all of the newly originated conforming loans that we originate directly with borrowers or assist PMT in acquiring from mortgage lenders through our correspondent production programactivities qualify under existing standards for inclusion in mortgage securities backedMBS issued by Fannie Mae or Freddie Mac or guaranteed by Ginnie Mae. We also derive other material financial benefits from theseour Agency relationships, including the assumption of credit risk by certain of these Agencies on loans included in such mortgage securitiesMBS 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.

The conservatorship of Fannie Mae and Freddie Mac and related efforts, along with anyAny changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the U.S. federal government, could adversely affect our business and prospects. TheirAlthough the U.S. Treasury has committed capital to Fannie Mae and Freddie Mac, these actions may not be adequate for their needs. Any discontinuation of, or significant reduction in, the operation of Fannie Mae or Freddie Mac or any significant adverse change in their capital structure, financial condition, activity levels in the primary or secondary mortgage markets or in underwriting criteria could materially and adversely affect our business, liquidity, financial condition, results of operations and our ability to make distributions to our stockholders.

Under the new government administration, the roles of Fannie Mae and Freddie Mac could be significantly restructured, reduced or eliminated and the nature of the guarantees could be considerably limited relative to historical measurements. Elimination of the traditional roles of Fannie Mae and Freddie Mac, or any changes to the nature or extent of the guarantees provided by Fannie Mae and Freddie Mac or the fees, terms and guidelines that govern our selling and servicing relationships with them, such as continued increases in the guarantee fees we are required to pay, initiatives that increase the number of repurchase requests and/or the manner in which they are pursued, or possible limits on delivery volumes imposed upon us and other seller/servicers, could also materially and adversely affect our business, including our ability to sell and securitize loans inthrough our correspondentloan production activities,segment, and the performance, liquidity and market value of our investments.

Although 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 U.S. Treasury has committed capital to Fannie Mae and Freddie Mac, these actions may not be adequate fornature of the GSEs or their needs. If Fannie Mae and Freddie Mac are adversely affected by events such as ratings downgrades, their inability to obtain any necessary government funding and capital, their lack of success in resolving repurchase requests to their lenders, foreclosure problems and delays and problems with mortgage insurers, Fannie Mae and Freddie Macguarantee obligations could suffer lossesredefine what constitutes an Agency MBS and could fail to honor their guaranteeshave broad adverse implications for the market and other obligations. Any discontinuation of, or significant reduction in, the operation of Fannie Mae or Freddie Mac or any significant adverse change in theirour business, financial condition the level of their activity in the primary or secondary mortgage markets or in their underwriting criteria could materially and adversely affect our business, liquidity, financial position, results of operations and our ability to make distributions to our shareholders.operations.

 

Our ability to generate revenues from newly originated loans that we assist PMT in acquiring through its correspondent production programbusiness 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 begun approving new and smaller lenders that traditionally may not have qualified for such approvals. To the extent that these lenders choose to sell directly to the Agencies rather than through loan aggregators like us, the number of loans available for purchase by aggregators is reduced, which could materially and adversely affect our business and results of operations. Similarly, to the extent the Agencies increase the number of purchases and sales for their own accounts, our business and results of operations could be materially and adversely affected.

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Changes in Agency guidelines or guarantees could adversely affect our business, financial condition and results of operations.

 

We are required to follow specific guidelines that impact the way that we serviceoriginate and originateservice Agency loans, including guidelines with respect to:

·

minimum financial requirements relating to our net worth, capital ratio and liquidity;

·

credit standards for mortgage loans;

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·

our staffing levels and other servicing practices;

·

the servicing and ancillary fees that we may charge;

·

our modification standards and procedures; and

·

the amount of non‑reimbursable advances.

 

In particular, the FHFAFederal Housing Finance Agency (“FHFA”) has directed Fannie Mae and Freddie Mac to align their guidelines for servicing delinquent mortgages that they own or that back securities which they guarantee, which can result in monetary incentives for servicers that perform well and penalties for those that do not. In addition, the FHFA has directed Fannie Mae and Freddie Mac to assess compensatory penalties against servicers in connection with the failure to meet specified timelines relating to delinquent loans and foreclosure proceedings, and other breaches of servicing obligations. Our failure to operate efficiently and effectively within the prevailing regulatory framework and in accordance with the applicable origination and servicing guidelines 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 and results of operations.

 

We generally cannot negotiate these terms with the Agencies and they are subject to change at any time. A significant change in these guidelines that has the effect of decreasing the fees we charge or requires us to expend additional resources in providing mortgage services could decrease our revenues or increase our costs, which would also adversely affect our business, financial condition and results of operations.

 

In addition, changes in the nature or extent of the guarantees provided by Fannie Mae and Freddie Mac or the insurance provided by the FHA could also have broad adverse market implications. The guarantee fees that we are required to pay to the Agencies for these guarantees have increased significantly over time and any future increases in these fees or the premiums we are required to pay the FHA for insurance would adversely affect our business, financial condition and results of operations.

Our inability to meet certain net worth and liquidity requirements imposed by Ginnie Mae, Fannie Mae or Freddie Mac could have a material adverse effect on our business, financial condition and results of operation.

On October 2014, Ginnie Mae announced several new issuer requirement changes, as well as a new issuer scorecard as part of an overall effort to ensure that Ginnie Mae’s MBS guarantee program continues to be flexible and available to as many entities as possible.  The issuer scorecard will enable issuers to better understand and comply with Ginnie Mae expectations and provide issuers with a framework and methodology from which they can gauge their effectiveness against a pre-determined set of Ginnie Mae metrics as well as how they rank against their peers.  The new Ginnie Mae financial requirements include net worth and liquid asset criteria for single-family issuers, as well as issuers participating in more than one MBS program.  Issuers approved on or before December 31, 2014 will be required to meet the new requirements beginning December 31, 2015. In order for an MSR bulk transfer to be approved by Ginnie Mae after January 1, 2015, the acquiring issuer will have to meet the new requirements. In order for an MSR flow transfer arrangement to be approved by Ginnie Mae, the acquiring issuer also will have to meet the new requirements.

On January 30, 2015, FHFA proposed new minimum financial eligibility requirements for GSE seller/servicers.  These newly proposed eligibility requirements align the minimum financial requirements for mortgage seller/servicers to do business with the GSEs.  Freddie Mac and Fannie Mae, at the direction of and in consultation with FHFA, undertook an extensive review of financial risks that the GSEs face from doing business with their sellers and servicers.  Based on this analysis, FHFA has proposed minimum financial requirements, including net worth, capital ratio and 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 GSE loans to cover the financial risks.  FHFA has released the proposed criteria to provide greater transparency, clarity and consistency to industry participants and other stakeholders.  FHFA anticipates that the

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proposed minimum financial requirements will be finalized in the second quarter of 2015, and will be effective six months after they are finalized. 

If these new net worth and liquidity requirements are more restrictive than we anticipate, our ability to enter into certain transactions might be impaired which could have a material adverse effect on our business, financial position, results of operations and cash flows.

Changes to government mortgage modification and refinancerelated programs could adversely affect our future revenues and costs.

 

Under HAMPAs a participating servicer under the Making Home Affordable program (“MHA”) and similar government programs, a participating servicer may bewe were entitled to receive financial incentives in connection with anycertain modification plans that it enterswe entered into with eligible borrowers and subsequent success fees to the extent that a borrower remainsremained current in any agreed upon loan modification. While we participateWe also participated in and dedicatededicated numerous resources to HAMP, changes in legislation or regulation regarding HAMP or any other government mortgage modification program or changes in the requirements necessaryHome Affordable Modification Program (“HAMP”), which allowed homeowners to qualify forseek loan modifications refinancing mortgage loans may impact the extentas a way to which we participate in and receive financial benefits from such programs, or may increase our operating costsavoid foreclosures, and the expense of our participation in such programs.

On October 24, 2011, the FHFA announced changes to the existing Home Affordable Refinance Program (“HARP”), including the FHA’s Short Refinance Program, which allowed us to refinance loans for certain loans sold to Fannie Mae and Freddie Mac prior to May 31, 2009. The changes to HARP are designed to increase the number of mortgage loans eligible for refinancing under the program and have meaningfully increased industry‑wide loan production volumes. These changes and any additional changes that may be enacted to increase refinancing eligibility under this program will likely increase mortgage loan prepayment speeds, which would have an unfavorable impact on the valuation of our MSRs. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures about Market Risk.”

existing borrowers who had little or negative equity in their homes. HAMP, MHA and HARP are currentlyexpired as scheduled to expire on December 31, 2015. If HAMP or HARP is not extended, this2016. The expiration of these programs could decreasenegatively impact our future revenues and costs, which wouldcould adversely affect our business, financial condition and results of operations.

 

HARP allows usWe may be subject to refinance loanscertain banking regulations that may limit our business activities.

As of September 30, 2016, PNC Financial Services Group Inc. (“PNC”) owned approximately 22% of the outstanding voting common shares of BlackRock, Inc. Based on PNC’s interests in and relationships with BlackRock, Inc., BlackRock, Inc. is deemed to be a non-bank subsidiary of PNC. BlackRock, Inc. is an LTV greater than 100%affiliate of BlackRock Mortgage Ventures, LLC, which is one of our largest equity holders. Due to these relationships, we are deemed to be a non-bank subsidiary of PNC, which is regulated as a financial holding company under the Bank Holding Company Act of 1956, as amended. As a non-bank subsidiary of PNC, we may be subject to certain banking regulations, including the supervision and regulation of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). This program,Such banking regulations could limit the activities and the FHA’s short refinance program, allowtypes of businesses that we may conduct. The Federal Reserve has broad enforcement authority over financial holding companies and their subsidiaries. The Federal Reserve could exercise its power to restrict PNC from having a non-bank subsidiary that is engaged in any activity that, in the Federal Reserve’s opinion, is unauthorized or constitutes an unsafe or unsound business practice, and could exercise its power to restrict us from engaging in any such activity. The Federal Reserve may also impose substantial fines and other penalties for violations that we may commit. To the extent that we, as a non-bank mortgage lender, are subject to refinance loansbanking regulations, we could be at a competitive disadvantage because many of our non-bank competitors are not subject to existing borrowers who have littlethese same regulations.

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In addition, provisions of the Dodd-Frank Act referred to as the “Volcker Rule” prohibit or negativerestrict 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, their homes.sponsors or advises a covered fund. The FHA’s short refinance programVolcker Rule prohibits proprietary trading as defined by such rule, unless the trading is scheduledpermitted by an exemption, such as for risk-mitigating hedging purposes. The Volcker Rule applies to expire onus by virtue of our affiliation with PNC through BlackRock. On July 7, 2016, the Federal Reserve announced that it had granted a final one-year extension in order to permit bank holding companies until July 21, 2017 to conform transactions with covered funds that were in place prior to December 31, 2016,2013 (“legacy funds”) to the covered funds requirements of the Volcker Rule. (Covered funds that are not legacy funds have been required to conform since July 21, 2015.) 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 expiration of that programcovered fund could be prohibited or changes in legislation or regulations regarding that programrestricted, or the Making Home Affordable Program (“MHA”)fund may need to be restructured. These prohibitions, restrictions and limitations could reduce our volumedisadvantage 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 refinancing originations to borrowers with little or negative equity in their homes.

Changes to HAMP, HARP, the MHA and other similar programs couldVolcker Rule may adversely affect our future revenuesbusiness, financial condition and costs.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 banking,lending, loan servicing or debt collection licensing and regulatory requirements. We must comply with state licensing requirements and varying compliance requirements in all 50 states, the District of Columbia, Guam and the U.S. Virgin Islands, and regulatory changes may increase our costs through stricter licensing laws, disclosure laws or increased fees or may impose conditions to licensing that we or our personnel are unable to meet.

 

In most states in which we operate, a regulatory agency or agencies regulate and enforce laws relating to mortgage servicers and mortgage originators. These rules and regulations generally provide for licensing as a mortgage servicer, mortgage originator, loan modification processor/underwriter, or third‑party debt default specialist (or a combination thereof), requirements as to the form and content of employee compensation contracts and other documentation, licensing of our employees and those of independent contractors with whom we contract, and employee hiring background checks. They also set

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forth restrictions on advertising and collection practices and disclosure and record‑keeping requirements, and they establish a variety of borrowers’ rights. Future state legislation and changes in existing regulation may significantly increase our compliance costs or reduce the amount of ancillary fees, including late fees, thatincome we may chargeare entitled to borrowers.collect from borrowers or otherwise. This could make our business cost‑prohibitive in the affected state or states and could materially affect our business.

 

The failure of PennyMac Loan Services, LLC to avail itself of an appropriate exemption from registration as an investment company under the Investment Company Act could have a material and adverse effect on our business.

We may not be ableintend to maintain all currently requisite licensesoperate so that we and permits. In addition, the states that currently do not provide extensive regulationeach of our subsidiaries are not required to register as investment companies under the Investment Company Act. We believe that our subsidiary, PennyMac Loan Services, LLC (“PLS”), qualifies for the exemption provided in Section 3(c)(6) because it has been, and is expected to continue to be, primarily engaged, directly or through majority-owned subsidiaries, in (1) the business may later chooseof purchasing or otherwise acquiring mortgages or other liens on and interests in real estate (from which not less than 25 percent of its gross income during its last fiscal year was and will continue to do so,be derived), together with (2) an additional business or businesses other than investing, reinvesting, owning, holding, or trading in securities, namely the business of servicing mortgages. Although we expect not less than twenty five percent (25%) of PLS’ gross income to be derived from originating, purchasing, or acquiring mortgages or liens on and if such states so act,interests in real estate, there can be no assurances that the composition of PLS’ gross income will remain the same over time.

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To date, the SEC staff has provided limited guidance with respect to the applicability of Section 3(c)(6), and PLS has not sought a no-action letter from the SEC staff respecting its position. If PLS is ultimately unable to rely on the Section 3(c)(6) exemption due to a failure to meet the 25 percent of gross income test or to the extent that the SEC staff provides negative guidance regarding the applicability or scope of the exemption, we may be required to either (a) register as an investment company, or (b) substantially restructure our business, change our investment strategy and/or the manner in which we conduct our operations in order to qualify for another Investment Company Act exemption and avoid being required to register as an investment company, either of which could materially and adversely affect our business, liquidity, financial condition, results of operations, and ability to pay dividends. 

In the case of a restructuring, PLS could temporarily rely on Rule 3a-2 for its exemption from registration. Rule 3a-2 provides a safe harbor exemption, not to exceed one year, for companies that have a bona fide intent to be ableengaged in an excepted activity but temporarily fail to obtain meet the requirements for an exemption. In such case, PLS would likely be required to restructure its business by acquiring and/or disposing of assets in order to meet an exemption under Section 3(c)(5)(C), depending on the composition of its assets at the time. The SEC staff’s position on Section 3(c)(5)(C) generally requires that an issuer maintain all requisite licenses and permits. The failure to satisfy thoseat least 55% of its assets in mortgages and other liens on and interests in real estate (qualifying assets) and at least 80% of its assets in qualifying assets plus real estate-related assets.  PLS would be more limited in its ability to hold MSRs or would be required to acquire and hold more mortgage loans and real estate to adjust the composition of its assets to meet the 55% and 80% tests.

If PLS is required to register as an investment company, we would be required to comply with a variety of substantive requirements under the Investment Company Act that impose, among other things: limitations on capital structure; restrictions on specified investments; prohibitions on transactions with affiliates; compliance with reporting, record keeping, voting and proxy disclosure; and, other rules and regulations that would significantly increase our operating expenses. Further, if PLS was or is required to register as an investment company, PLS would be in breach of various representations and warranties contained in its credit and other agreements resulting in a default as to certain of our contracts and obligations. This could also subject us to civil or criminal actions or regulatory requirements couldproceedings, or result in a default undercourt appointed receiver to take control of us and liquidate our servicing agreements and credit facilities andbusiness, any or all of which could have a material adverse effect on our business, financial condition, and results of operations.

Government inquiries into foreclosure and bankruptcy practices and the associated delays could result in additional compliance costs on our servicing business, and may adversely impact our results of operations, financial condition and business.

In connection with allegations of irregularities in foreclosure and bankruptcy processes, including so-called “robo-signing” by mortgage loan servicers, certain state Attorneys General, court administrators and government agencies, as well as federal and state government representatives, have issued letters of inquiry about policies and procedures and requested suspension of foreclosure and bankruptcy proceedings against certain mortgage servicers, especially with respect to notarization, affidavit and notice procedures.  Most recently, on March 3, 2015, a U.S. Bankruptcy Court in Michigan entered an order approving a settlement between the United States Trustee Program and a major bank  in which the bank agreedability to pay over $50 million as a result of, among other things, filing payment change notices with bankruptcy courts by employees who had not verified the accuracy of the notices.  If similar administrative, judicial or legislative actions are taken by federal or state regulators, court administrators or government entities against us, we may be subjected to fines and other sanctions, including foreclosure or bankruptcy moratoria, suspensions or delays.  

Also, on February 9, 2012, federal and state agencies announced a $25 billion settlement with the five largest banks that resulted from investigations of foreclosure practices, which is referred to as the National Mortgage Settlement (the “Settlement”). As part of the Settlement, the banks agreed to comply with various servicing standards relating to foreclosure and bankruptcy proceedings, documentation of borrowers’ account balances, chain of title, and evaluation of borrowers for loan modifications and short sales as well as servicing fees and the use of force-placed insurance.

Although we are not a party to the Settlement, we are required to comply with certain material requirements and terms where, among other things, (i) we subservice loans in certain circumstances for the mortgage servicers that are parties to the Settlement, (ii) the agencies begin to enforce the Settlement by looking downstream to our arrangement with certain mortgage servicers, (iii) the MSR owners for whom we subservice loans or the mortgage loan sellers from whom we or our Advised Entities purchase loans request that we comply with certain aspects of the Settlement, or (iv) we otherwise find it prudent to comply with certain aspects of the Settlement. In addition, the practices set forth in the Settlement may be adopted by the industry as a whole, forcing us to comply with them in order to follow standard industry practices, or may become required by our servicing agreements. While we have made and continue to make changes to our operating policies and procedures in light of the Settlement, further changes could be required and changes to our servicing practices may increase compliance and operating costs for our servicing business, which could materially and adversely affect our financial condition or results of operations.  

We may be subject to liability for potential violations of various lending laws, which could adversely impact our results of operations, financial condition and business.

Mortgage loan originators and servicers operate in a highly regulated industry and are required to comply with various federal, state and local laws and regulations, including anti‑predatory lending laws and laws and regulations imposing certain restrictions and requirements on “high cost” loans. To the extent these originators or servicers fail to comply with applicable law and any of their mortgage loans become part of our assets, it could subject us, as an assignee or purchaser of the related mortgage loans, to monetary penalties or other losses and could result in the borrowers

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rescinding the affected mortgage loans. Further, if any of our loans are found to have been originated, serviced or owned by us or a third party in violation of applicable law, we could be subject to lawsuits or governmental actions, or we could be fined or incur losses, any of which could adversely impact 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, 2014, PNC Financial Services Group, Inc., or PNC, owned approximately 21% of the outstanding voting common shares of BlackRock Inc. Based on PNC’s interests in and relationships with BlackRock, Inc., BlackRock, Inc. is deemed to be a non‑bank subsidiary of PNC. BlackRock, Inc. is an affiliate of BlackRock Mortgage Ventures, LLC, or BlackRock, which is one of our largest equity holders. Due to these relationships, we are deemed to be a non‑bank subsidiary of PNC, which is regulated as a financial holding company under the Bank Holding Company Act of 1956, as amended. As a non‑bank subsidiary of PNC, we may be subject to certain banking regulations, including the supervision and regulation of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Such banking regulations could limit the activities and the types of businesses that we may conduct. The Federal Reserve has broad enforcement authority over financial holding companies and their subsidiaries. The Federal Reserve could exercise its power to restrict PNC from having a non‑bank subsidiary that is engaged in any activity that, in the Federal Reserve’s opinion, is unauthorized or constitutes an unsafe or unsound business practice, and could exercise its power to restrict us from engaging in any such activity. The Federal Reserve may also impose substantial fines and other penalties for violations that we may commit. To the extent that we are subject to banking regulation, we could be at a competitive disadvantage because some of our competitors are not subject to these limitations.

In addition, provisions of the Dodd‑Frank Act referred to as the “Volcker Rule” restrict bank holding companies and their affiliates from sponsoring, investing in and conducting certain transactions with certain investment funds, including hedge funds and private equity funds (collectively “covered funds”). The Volcker Rule also restricts proprietary trading, which affects certain hedging activities. The Volcker Rule applies to us by virtue of our affiliation with PNC through BlackRock. On December 10, 2013, the regulatory agencies responsible for enforcing the Volcker Rule issued implementing regulations that became effective April 1, 2014, but there is a conformance period, currently set to end on July 21, 2015, during which banking entities subject to the Volcker Rule may conform their investments and activities to the requirements of the Volcker Rule. The Volcker Rule limits our ability to sponsor or manage covered funds and to make and retain investments in covered funds, and limits investments in certain covered funds by our employees, among other restrictions. We believe that none of the funds that we currently manage, including the Investment Funds or PMT, are “covered funds.” However, if the Investment Funds or PMT were to be “covered funds” as defined, then, among other consequences, certain transactions between us and the Advised Entities could be limited or required to be restructured. These limitations and restrictions 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 future originations and investments in commercial mortgage loans and other commercial real estate-related loans are dividends.dependent upon the success of the multifamily and commercial real estate sectors and may be affected by conditions that could materially adversely affect our business and results of operations.

We expect to originate loans and acquire real estate assets secured by multifamily and commercial properties. The profitability of these business activities will be closely tied to the overall success of the multifamily and commercial real estate market. Various changes in real estate conditions may impact the multifamily and commercial real estate sectors. Any negative trends in such real estate conditions may reduce demand for our products and services and, as a result, adversely affect our results of operations. These conditions include:

·

oversupply of, or a reduction in demand for, multifamily housing and commercial properties;

·

a favorable single-family real estate or interest rate environment that may result in a significant number of potential residents of multifamily properties deciding to purchase homes instead of renting;

·

rent control or stabilization laws, or other laws regulating multifamily housing, which could affect the profitability of multifamily developments;

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·

the inability of residents or tenants to pay rent;

·

increased competition in the multifamily and commercial real estate sectors based on considerations such as the attractiveness, location, rental rates, amenities and safety record of various properties; and

·

increased operating costs, including increased real property taxes, maintenance, insurance and utilities costs.

Moreover, other factors may adversely affect the multifamily and commercial real estate sectors, including changes in government regulations and other laws, rules and regulations governing real estate, zoning or taxes, changes in interest rate levels, the potential liability under environmental and other laws, delinquency, foreclosure and other unforeseen events. Any or all of these factors could negatively impact the multifamily and commercial real estate sectors and, as a result, reduce the demand for our products and services. Any such reduction could materially and adversely affect us.

 

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 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 conditions.

 

The success of our business strategies and our results of operations are materially affected by current conditions in the mortgage markets, the financial markets and the economy generally. Continuing concerns over factors including inflation, deflation, unemployment, personal and business income taxes, healthcare, energy costs, geopolitical issues and the availability and cost of credit have contributed to increased volatility and unclear expectations for the economy in general and the real estate and mortgage markets in particular going forward. Since 2006, United States residential housing valuesThe mortgage markets have declinedbeen and continue to be affected by approximately 14% according to the seasonally adjusted S&P/Case‑Shiller 20-City Home Price Index, and the volume of newly originated mortgages has decreased by approximately 58%. While national housing values have increasedchanges in the last 12 months, these conditions may not have stabilized or they may worsen.lending landscape, defaults, credit losses and significant liquidity concerns. A destabilization of the real estate and mortgage markets or deterioration in these markets may reduce our loan production volume, reduce the profitability of servicing mortgages or adversely affect our ability to sell mortgage loans that we

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originate or acquire, either at a profit or at all. Any of the foregoing could materially adversely affect our business, financial condition and results of operations.

We may not be able to continue to grow our loan production volume, which could negatively affect our business, financial condition and results of operations.

Our loan production operations consist of our consumer direct originations program, in which we originate mortgage loans directly with borrowers through telephone call centers or the Internet, and our correspondent production program, 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.

Our correspondent production program is relationship driven. As of December 31, 2014, we worked with 344 approved mortgage lenders, but these lenders are not contractually obligated to do business with us or PMT, and our competitors also have relationships with these lenders and actively compete with us in our efforts to expand PMT’s network of approved mortgage lenders. In order to increase our loan production volume, we will need to not only

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maintain PMT’s existing relationships, but also develop PMT’s relationships with additional mortgage lenders. To date, we have grown our loan production volumes with mortgage lenders on the basis of our product offerings, technical knowledge, manufacturing quality, speed of execution, rate and fees. If we are not able to consistently maintain these qualities of execution, our reputation and existing relationships with mortgage lenders could be damaged. We may not be able to maintain PMT’s existing relationships or develop new relationships with mortgage lenders or our new mortgage products may not gain widespread acceptance.

Our current volume of consumer direct originations, which is based in large part on the refinancing of existing mortgage loans that we service, is highly dependent on interest rates and government mortgage modification programs and may decline if interest rates increase or these programs are terminated. Our non-servicing portfolio consumer direct originations platform may not succeed because of the referral‑driven nature of our industry. For example, the origination of purchase money mortgage loans is greatly influenced by traditional business clients in the home buying process such as real estate agents and builders. As a result, our ability to secure relationships with such traditional business clients will influence our ability to grow our purchase money mortgage loan volume and, thus, our consumer direct originations business. We may not be successful in establishing such relationships. In addition, to grow our consumer direct originations business, we will need to convert leads regarding prospective borrowers into funded loans, the success of which depends on the pricing we offer relative to the pricing of our competitors and our operational ability to process, underwrite and close loans. Institutions that compete with us in this regard may have significantly greater access to capital or resources than we do, which may give them the benefit of a lower cost of operations.

Our correspondent production and consumer direct origination businesses are also subject to overall market factors that can impact our ability to grow our loan production volume. For example, increased competition from new and existing market participants, reductions in the overall level of refinancing activity or slow growth in the level of new home purchase activity can impact our ability to continue to grow our loan production volume, 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 believe that changes in supply and demand within the marketplace have been driving lower margins in recent periods, which is reflected in our results of operations and in our gains on mortgage loans held for sale. If we are unable to grow our loan production volumes or if our margins become compressed, then our business, financial condition and results of operations could be adversely affected.

 

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 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.

 

Competition in servicing mortgage loans and in originating or acquiring newly originated mortgage loans comes from large commercial banks and savings institutions and other independentnon-bank mortgage servicers and originators. Many of these institutions have significantly greater resources and access to capital than we do, which may give them the benefit of a lower cost of funds. Additionally, our existing and potential competitors may decide to modify their business models to compete more directly with our loan production and servicing models. For example, other non‑bank loan servicers may try to leverage their servicing relationships and expertise to develop or expand a loan origination business. Since the withdrawal of a number of large participants from these markets following the financial crisis in 2008, there havehas been relatively few largea steady increase in the number of non‑bank participants. As more non‑bank entities enter these markets, our mortgage banking businesses may generate lower margins in order to effectively compete.

 

In addition, technological advances and heightened e‑commerce activities have increased consumers’ accessibility 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 industriesmortgage banking businesses and this could materially adversely affect our business, financial condition 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 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, and 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.

Our correspondent production activities are relationship driven. As of December 31, 2016, we worked with 522 approved mortgage lenders, but these lenders are not contractually obligated to do business with us or PMT, and our competitors also have relationships with these lenders and actively compete against us in our efforts to expand PMT’s network of approved mortgage lenders. In order to increase our loan production volume, we will need to not only maintain PMT’s existing relationships, but also develop PMT’s relationships with additional mortgage lenders. To date, we have grown our loan production volumes with mortgage lenders on the basis of our product offerings, technical knowledge, manufacturing quality, speed of execution, rate and fees. If we are not able to consistently maintain these qualities of execution, our reputation and existing relationships with mortgage lenders could be damaged. We may not be able to maintain PMT’s existing relationships or develop new relationships with mortgage lenders or our new mortgage products may not gain widespread acceptance.

Our current volume of consumer direct lending originations, which is based in large part on the refinancing of existing mortgage loans that we service, is highly dependent on interest rates and government mortgage modification programs and may decline if interest rates increase or these programs are terminated. Our non-servicing portfolio consumer direct lending platform may not succeed because of the referral‑driven nature of our industry. For example, the origination of purchase money mortgage loans is greatly influenced by traditional business clients in the home buying process such as real estate agents and builders. As a result, our ability to secure relationships with such traditional business clients will influence our ability to grow our purchase money mortgage loan volume and, thus, our consumer

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Our earnings may decrease because of changes in prevailing interest rates.

Our profitability is directly affected by changes in prevailing interest rates. The following are the material risks we face related to increases in prevailing interest rates:

·

an increase in prevailing interest rates could adversely affect our loan production volume because refinancing an existing loan would be less attractive for homeowners and qualifying for a loan may be more difficult for consumers;

·

an increase in prevailing interest rates would increase the cost of servicing our outstanding debt, including debt related to servicing advances and loan production; and

·

an increase in prevailing interest rates could increase payments for servicing customers with adjustable rate mortgages and generate an increase in delinquency, default and foreclosure rates, resulting in an increase in our loan servicing expenses.

The following are the material risks we face related to decreases in prevailing interest rates:

·

a decrease in prevailing interest rates may cause more borrowers to refinance existing loans that we service or may cause the expected volume of refinancings to increase, which would require us to record decreases in fair value and a higher level of amortization, impairment or both on our MSRs; and

·

a decrease in prevailing interest rates could reduce our earnings from our custodial deposit accounts.

An event of default, a negative ratings action by a rating agency, the perception of financial weakness, an adverse action by a regulatory authority, a lengthening of foreclosure timelines or a general deterioration in the economy 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, wedirect lending business. We may not be ablesuccessful in establishing such relationships. In addition, to adjustgrow our consumer direct lending business, we will need to convert leads regarding prospective borrowers into funded loans, the success of which depends on the pricing we offer relative to the pricing of our competitors and our operational capacityability to process, underwrite and close loans. Institutions that compete with us in this regard may have significantly greater access to capital or resources than we do, which may give them the benefit of a timely fashion,lower cost of operations.

On the other hand, we may experience significant growth in our correspondent production and consumer direct lending loan volumes. If we do not effectively manage our growth, the quality of our correspondent production and consumer direct lending operations could suffer, which could negatively affect our brand and operating results.   Our correspondent production and consumer direct lending operations are also subject to overall market factors that can impact our ability to grow our loan production volume. For example, increased competition from new and existing market participants, reductions in the overall level of refinancing activity or at all,slow growth in responsethe level of new home purchase activity can impact our ability to increasescontinue 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 decreases in mortgage production volume resulting fromprojected levels. We believe that changes in prevailing interest rates.

Anysupply and demand within the marketplace have been driving lower margins in recent periods, which is reflected in our results of the increasesoperations and in our gains on mortgage loans held for sale. If we are unable to grow our loan production volumes or decreases discussed above could have a material adverse effect onif our margins become compressed, then our business, financial condition orand results of operations.operations could be adversely affected.

 

We may be unable to obtain 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Our ability to refinance existing debt and borrow additional funds is affected by a variety of factors beyond our control including:

·

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;

·

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.

 

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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 ourthe financing requirements of our business, our financial condition 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 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

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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, our financial condition 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 financial condition 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 operationsbusiness and our acquisitions ofthe government‑insured loans acquired through our correspondent production operations from PMT throughwith borrowings under repurchase agreements. When we enter into repurchase agreements, we sell mortgage loans to lenders, which are the repurchase agreement counterparties, and receive cash from the lenders. The lenders are obligated to resell the same assets back to us at the end of the term of the transaction. TheBecause 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), so 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.

 

Unlike banks,In addition, we invest in certain assets, including MSRs, for which financing has historically been difficult to obtain. We currently leverage certain of our MSRs under secured financing arrangements. Our Fannie Mae and Freddie Mac MSRs are pledged to secure borrowings under a loan and security agreement, while our Ginnie Mae MSRs and related 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 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 notunable 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 regulatory restrictionsthe 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 investment portfolio’s cash flows. We cannot assure you 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 adversely impact our business, financial condition, liquidity, results of operations and our ability to make distributions to stockholders.

We 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

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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.

Our return on our investments and cash available for distribution to our stockholders may be reduced to the extent that changes in market conditions increase the cost of our financing relative to the income that can be derived from the investments acquired. Our debt service payments also reduce cash flows available for distribution to stockholders. In the event we are unable to meet our debt service obligations, we risk the loss of some or all of our assets to foreclosure or sale to satisfy the obligations.

Our credit and financing agreements contain financial and restrictive covenants that could adversely affect our financial condition and our ability to operate our businesses.

Although our governing documents contain no limitation on the amount of debt we may incur, the lenders under our leverage. Ourcredit 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 borrowings are only restricted by covenants in our repurchase and other borrowing agreements, minimum capital requirements mandated by the Agencies pursuantliabilities to seller/servicer arrangements, and market conditions.tangible net worth. Incurring substantial debt subjects us to the risk that our cash flowflows 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.

 

Our existing repurchasecredit and financing agreements also impose other financial and non‑financial covenants and restrictions on us that limit the amount of indebtedness that we may incur, impact our liquidity through minimum cash reserve requirements, and impact our flexibility to determine our operating policies and investment strategies. See “Management’s Discussionstrategies by limiting our ability to incur certain types of indebtedness; grant liens; engage in consolidations, mergers and Analysis of Financial Conditionasset sales, make restricted payments and Results of Operations—Liquidityinvestments; enter into transactions with affiliates; and Capital Resources.”amend, modify or prepay certain indebtedness. In our repurchasecredit and other borrowingfinancing agreements, we agree to certain covenants and restrictions and we make representations about the loansassets sold or pledged under these agreements,agreements. We also agree to certain events of default (subject to certain materiality thresholds and grace periods), including that the loans were originated in compliance with applicable law.payment defaults, breaches of financial and other covenants and/or certain representations and warranties, cross-defaults, servicer termination events, ratings downgrades, guarantor defaults, bankruptcy or insolvency proceedings and other events of default and remedies customary for these types of agreements. If we default on our obligations under a repurchasecredit 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 loans, andassets, and/or cease entering into any other repurchasecredit transactions with us.

Because our repurchasecredit 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 repurchasecredit and financing agreements could materially and adversely affect our business, financial condition and results of operations.

Our earnings may decrease because of changes in prevailing interest rates.

Our profitability is directly affected by changes in prevailing interest rates. The following are the material risks we face related to increases in prevailing interest rates:

·

an increase in prevailing interest rates could adversely affect our loan production volume because refinancing an existing loan would be less attractive for homeowners and qualifying for a loan may be more difficult for consumers;

·

an increase in prevailing interest rates would increase the cost of servicing our outstanding debt, including debt related to servicing assets and loan production; and

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·

an increase in prevailing interest rates could increase payments for servicing customers with adjustable rate mortgages and generate an increase in delinquency, default and foreclosure rates, resulting in an increase in our loan servicing expenses.

The following are the material risks we face related to decreases in prevailing interest rates:

·

a decrease in prevailing interest rates may cause more borrowers to refinance existing loans that we service or may cause the expected volume of refinancing to increase, which would require us to record decreases in fair value and a higher level of amortization, impairment or both on our MSRs; and

·

a decrease in prevailing interest rates could reduce our earnings from our custodial deposit accounts.

An event of default, a negative ratings action by a rating agency, the perception of financial weakness, an adverse action by a regulatory authority, a lengthening of foreclosure timelines or a general deterioration in the economy that constricts the availability of credit may increase our cost of funds and make it difficult for us to refinance existing debt and borrow additional funds. In addition, we may not be able to adjust our operational capacity in a timely fashion, or at all, in response to increases or decreases in mortgage production volume resulting from changes in prevailing interest rates.

Any of the increases or decreases discussed above could have a material adverse effect on our business, financial condition or 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:

·

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;

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·

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, and results of operations.operations and cash flows.

 

We use estimates in determining the fair value of our MSRs, which are highly volatile assets with continually changing values. If our estimates of their value prove to be inaccurate, we may be required to write down the values of the MSRs which could adversely affect our financial condition and results of operations.

 

The value of our MSRs is based on the cash flows projected to result from the servicing of the related mortgage loans and continually fluctuates due to a number of factors. These factors include prepayment speeds, changes in interest rates and other market conditions, which affect the number of loans that are repaid or refinanced and thus no longer result in cash flows, and the number of loans that become delinquent.

 

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 higher than anticipated or other factors perform worse than modeled, the recorded value of certain of our MSRs may decrease, which would adversely affect our financial condition and results of operations.

 

The geographic concentration of our servicing portfolio may decrease the value of our MSRs and adversely affect our consumer direct business, which would adversely affect our financial condition and results of operations.

As of December 31, 2016, approximately 22% of the aggregate outstanding loan balance in our servicing portfolio was secured by properties located in California.  To the extent that California or other states in which we have greater concentrations of business in the future experience weaker economic conditions or greater rates of decline in real estate values than the United States generally, such concentration may disproportionately decrease the value of our MSRs and adversely affect our consumer direct lending business. The impact of property value declines may increase in magnitude and it may continue for a long period of time. Additionally, if states in which we have greater concentrations of business were to change their licensing or other regulatory requirements to make our business cost‑prohibitive, we may be required to stop doing business in those states or may be subject to a higher cost of doing business in those states, which could have a material adverse effect on our business, financial condition and results of operations.

Increases in delinquencies and defaults may adversely affect our business, financial condition and results of operations.

 

Falling home prices across the United States 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. ManySome borrowers do not have sufficient equity in their homes to permit them to refinance their existing loans, which may reduce the volume or growth of our loan production business. This may also provide borrowers with an incentive to default on their mortgage loans even if they have the ability to make principal and interest payments. Further, despite recent increases, interest rates have remained near historical lows for an extended period of time. Borrowers with adjustable rate mortgage loans must make larger monthly payments when the interest rates on those mortgage loans adjust upward from their initial fixed rates or low introductory rates to the rates computed

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in accordance with the applicable index and margin. Increases in monthly payments may increase the delinquencies, defaults and foreclosures on a significant number of the loans that we service.

 

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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. 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 our interest expense and affect our liquidity as a result of borrowing under our credit facilities to fund an increase in the 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.

 

A disruption in the MBS market could materially and adversely affect our business, financial condition and results of operations.

 

Certain loans that we produce are pooled into MBS issued by Fannie Mae or Freddie Mac or guaranteed by Ginnie Mae MBS.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 able to accommodate on a timely basis the volume of loans that we typically sell in any given period. 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 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 and results of operations.

 

The geographic concentrationOur originations of our servicing portfoliocommercial mortgage loans and other commercial real estate-related loans are dependent upon the success of the small balance multifamily real estate market and may decrease the value of our MSRs andbe affected by conditions that could materially adversely affect our consumer direct business which wouldand results of operations.

We originate loans and acquire real estate assets secured by small balance multifamily properties. The profitability of these business activities will be closely tied to the overall success of the small balance multifamily real estate market. Various changes in real estate conditions may impact the small balance multifamily real estate sector. Any negative trends in such real estate conditions may reduce demand for our products and services and, as a result, adversely affect our financial condition and results of operations. These conditions include:

 

·

oversupply of, or a reduction in demand for, small balance multifamily housing properties;

As

·

a favorable single-family real estate or interest rate environment that may result in a significant number of potential residents of multifamily properties deciding to purchase homes instead of renting;

·

rent control or stabilization laws, or other laws regulating multifamily housing, which could affect the profitability of multifamily developments;

·

the inability of residents or tenants to pay rent;

·

increased competition in the small balance multifamily real estate sector based on considerations such as the attractiveness, location, rental rates, amenities and safety record of various properties; and

·

increased operating costs, including increased real property taxes, maintenance, insurance and utilities costs.

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Moreover, other factors may adversely affect the aggregate outstanding loansmall balance in our servicing portfolio was secured by properties located in California.  To the extent that California or other states in which we have greater concentrations of business in the future experience weaker economic conditions or greater rates of decline inmultifamily real estate values thanmarket, including changes in government regulations and other laws, rules and regulations governing real estate, zoning or taxes, changes in interest rate levels, the United States generally,potential liability under environmental and other laws, delinquency, foreclosure and other unforeseen events. Any or all of these factors could negatively impact the small balance multifamily real estate market and, as a result, reduce the demand for our products and services. Any such concentration may decrease the value of our MSRs andreduction could adversely affect our consumer direct business. The impact of property value declines may increase in magnitude and it may continue for a long period of time. Additionally, if states in which we have greater concentrations of business were to change their licensing or other regulatory requirements to make our business cost‑prohibitive, we may be required to stop doing business in those states or may be subject to higher cost of doing business in those states, which could have a material adverse effect on our business, financial condition and results of operations.us.

 

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 and results of operations.

 

PMT is the counterparty that currently acquires all of the newly originated mortgage loans in connection with our correspondent production businesses.operations. A significant portion of our income is derived from a fulfillment fee earned in connection with PMT’s acquisition of conventional loans. We are able to conduct our correspondent production businessoperations 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

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sourcing fee and fulfill them for our own account, typically by pooling the federally insured or guaranteed loans together into an MBS which Ginnie Mae guarantees. We earn interest income and gains or losses during the holding period and upon the sale of these securities, and we retain the MSRs with respect to the loans. If this relationship with PMT wasis terminated by PMT or PMT reducedreduces 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. Also,

We are also dependent upon PMT as a source of capital in connection with our ability to originate and service small balance multifamily loans. Through one of its subsidiaries, PMT is an approved multifamily seller/servicer for Freddie Mac, and we rely upon PMT to purchase the small balance multifamily loans that we originate in accordance with Freddie Mac guidelines and deliver such loans to Freddie Mac under this approval. If this relationship with PMT is terminated by PMT or Freddie Mac no longer permits PMT to sell small balance multifamily loans it acquires from us, it would require us to obtain additional debt financing, and there is no assurance that we would be able to sell such loans to another Agency or third party investor on favorable terms, or at all. Accordingly, a change in this relationship by and among PMT, Freddie Mac and us could have a material and adverse effect on our small balance multifamily loan business.

The management agreement, the mortgage banking and warehouse 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 and results of operations. The terms of these agreements extend until September 12, 2020, subject to automatic renewal for additional 18-month periods, but any of the agreements may be terminated earlier under certain circumstances or otherwise non-renewed. If any agreement is terminated or non-renewed and not replaced by a new agreement, it would materially and adversely affect our ability to continue to execute our business plan.

 

We expect that PMT will continue to qualify as a REIT for U.S. federal income tax purposes. However, it is possible that PMT may not meet the requirements for qualification as a REIT. If PMT were to lose its REIT status, corporate-level income taxes, including alternative minimum taxes, would apply to all of PMT's taxable income at federal and state tax rates, therebyrates. It is also possible that significant corporate tax reform could be passed under a new government administration that may decrease the attractiveness of a REIT investment. Either of these scenarios would potentially impairingimpair PMT’s financial position and its ability to raise capital, which could have a material adverse effect on our business, financial condition and results of operations.

 

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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 and results of operations.

 

PMT, as the owner of a substantial number of all of the MSRs or wholemortgage 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 and results of operations.

 

PMT has an exclusive right to acquire the loans that are produced through our correspondent production program,operations, which may limit the revenues that we could otherwise earn in respect of those loans.

 

Our mortgage banking and warehouse 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, unless PMT sells some of these loans back to us, 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 sale of excess servicing spread exposes us to significant risks.

 

We also sell to PMT or its subsidiaries, from time to time, the right to receive certain ESS arising from MSRs that we own or acquire. The ESS represents the difference between our contractual servicing fee with the applicable Agency and the base servicing fee that we retain as compensation for servicing the related mortgage loans upon our sale of the ESS.

 

As a condition of our sale of the ESS, PMT wasis 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 isin 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 Credit Suisse First Boston Mortgage Capital LLC (“Credit Suisse”)an indenture trustee on behalf of the note holders to which the special purpose entity issues its variable funding notes and term notes under a loan and security agreement,an indenture, pursuant to which Credit Suissethe 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). Credit Suisse also required PMT to enter into a security and subordination agreementThe indenture trustee, on behalf of the note holders, may liquidate our Ginnie Mae MSRs along with respectPMT’s interest in the ESS to the acquired ESS, pursuant to which it acknowledges Credit Suisse’s blanket lien. The security and subordination agreement contains certain trigger events applicable to PMT, including breaches of its representations, warranties or covenants and defaults

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under other of its credit facilities that would require us to either (i) repay in full the outstanding loan amount under our loan and security agreement or (ii) repurchase the ESS from PMT at fair market value. To the extent we are unable to repay the loan under our loan and security agreement or repurchase the ESS,there exists an event of default would exist under the loan and security agreement, thereby entitling Credit Suisse to liquidateindenture, the ESS and the related MSRs. As a result a default by PMT under its security and subordination agreement that requires us to repay our loan and security agreement or repurchase the ESS, or that results in a loss of our Ginnie Mae MSRs,which could have a material adverse effect on our business, financial condition and results of operations.

Credit Suisse may also liquidate the ESS along with our related Ginnie Mae MSRs to the extent there exists an event of default under our loan and security agreement. In the event PMT’s ESS is liquidated as a result of certain of our actions or inactions, we generally would be required to indemnify PMT under the applicable spread acquisition agreement. A claim by PMT for the loss of its ESS as a result of our actions or inactions would likely be significant in size and could also have a material adverse effect on our business, financial condition 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 and results of operations.

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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 programlending 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 thosesuch loans under certain circumstances. Our contracts 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 underwriting or regulatory requirements in the current dynamic regulatory environment.

We believe that, as a result of the current market environment, many purchasers of mortgage loans, including the Agencies, are particularly aware of the conditions under which loan originators or sellers must indemnify them against losses related to purchased loans, or repurchase thosesuch loans, and would benefit from enforcing any indemnity or repurchase remedies they may have. Our loan sale agreements with purchasers, including the Agencies, includecontain provisions permitting purchasersthat generally require us to demand that we indemnify them for losses suffered in connection withor repurchase these loans sold that were originated in violation of applicable law or with other defects or demand repurchase of such loans. if:

·

our representations and warranties concerning loan quality and loan characteristics are inaccurate; or

·

the loans fail to comply with underwriting or regulatory requirements in the current dynamic regulatory environment.

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 UPB.underlying UPBs. In certain cases we would have contractual rights to recover from theinvolving mortgage lenders from whom loans were acquired through our correspondent production programactivities, we may have contractual rights to either recover some or all of the amount paid by us in connection with thisour indemnification losses or contractual rights to causeotherwise demand repurchase of these mortgage lenders to repurchase these loans from us.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 loans from us.the affected loans. If a material amount of recovery cannot be obtained from these mortgage lenders, our business, financial condition and results of operations could be materially and adversely affected.

Although thisour indemnification and repurchase exposure cannot be quantified with certainty, to recognize these potential indemnification and repurchase losses, we have recorded a liability of $13.3$19.1 million as of December 31, 2014.2016. Because of the increase in our loan production since 2010,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 loan indemnifications and repurchases may increase as well. As such, our indemnification and repurchase costs may increase well beyond our current expectations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Net Gains on Mortgage Loans Held for Sale at Fair Value.”

In addition, our mortgage banking and warehouse services agreement with PMT requires us to indemnify it with respect to loans for which we provide fulfillment services in certain instances. If we are required to indemnify PMT, or other purchasers against loans, or repurchase loans, that result in losses that exceed our reserve, this could have a material adverse effect on our business, financial condition and results of operations.

 

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We depend on the accuracy and completeness of information about borrowers and counterparties and any misrepresented information could adversely affect our business, financial condition and results of operations.

 

In deciding whether to approve loans or to enter into other transactions with borrowers and counterparties in our consumer direct lending and correspondent production activities,operations, we may rely on information furnished to us by or on behalf of borrowers and counterparties, including financial statements and other financial information. We also may rely on representations of borrowers and 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 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 from our business clients.acquisitions. Any such misrepresented information could have a material adverse effect on our business, financial condition and results of operations.

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Our prime servicing portfolio, which consists primarily of recently originated loans, has a limited performance history, which makes our future results of operations more difficult to predict.

The likelihood of mortgage delinquencies and defaults, and the associated risks to our business, including higher costs to service such loans and a greater risk that we may incur losses due to repurchase or indemnification demands, change as loans season. Newly originated loans typically exhibit low delinquency and default rates as the changes in economic conditions, individual financial circumstances and other factors that drive borrower delinquency often do not appear for months or years. Highly seasoned loan portfolios, in which borrowers have demonstrated years of performance on their mortgage payments, also tend to exhibit low delinquency and default rates. Most of the loans in our prime servicing portfolio were originated in the years 2010 through 2016. As a result, we expect the delinquency rate and defaults in the prime servicing portfolio to increase in future periods as the portfolio seasons, but we cannot predict the magnitude of this impact on our results of operations. In addition, because most of the loans in our portfolios were originated after the recent financial crisis, it may be difficult to compare our business to our competitors and others that have weathered the economic difficulties in our industry over the last several years.

Our counterparties may terminate our MSRs, which could adversely affect our business, financial condition 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 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 liquidity, business, financial condition 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 meet contractual principal and interest remittance requirements for investors, 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. If we receive requests for advances in excess of amounts that we are able to secure from our advance credit facility or, in the case of loans that we subservice, from the owner of the MSRs and loans, we may not be able to fund these advance requests, which could materially and adversely affect our loan servicing business. 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 and results of operations.

 

Our counterparties may terminate our servicing rights, which could adversely affect our business, financial condition and results of operations.

The owners of the loans that we service may terminate our MSRs if we fail to comply with applicable servicing guidelines. As is standard in the industry, under the terms of our master servicing agreements with the Agencies in respect of 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, the failure to comply with servicing standards could result in termination of our agreements with the Agencies with little or no notice and without any compensation. If the servicing rights were terminated on a material portion of our servicing portfolio, our business, financial condition and results of operations could be adversely affected.

Our failure to deal appropriately with various issues that may give rise to reputational risk, including conflicts of interest, legal and regulatory requirements, and negative publicity involving certain of our officers, could cause harm to our business and adversely affect our earnings.

Maintaining our reputation is critical to attracting and retaining clients, customers, trading counterparties, investors and employees.  If we fail to deal with, or appear to fail to deal with various issues that may give rise to reputational risk, we could significantly harm our business prospects and earnings.  Such issues include, but are not limited to, conflicts of interest, legal and regulatory requirements, negative public opinion involving certain of our officers, and any of the other risks discussed in this Item 1A. 

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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 our clients.  In addition, investors may perceive conflicts of interest regarding investment decisions for funds in which certain of our officers have made and may continue to make personal investments. Similarly, conflicts of interest may exist regarding decisions about the allocation of specific investment opportunities between funds in which we receive an allocation of profits as the general partner and funds in which we do not.

The SEC and certain regulators have increased their scrutiny of potential conflicts of interest, and as we experience growth in our businesses, we must continue to monitor and mitigate or otherwise address any conflicts between our interests and those of our clients. We have implemented procedures and controls to be followed when real or potential conflicts of interest arise, but it is possible that potential or perceived conflicts could give rise to the dissatisfaction of, or litigation by, investors in our Advised Entities or regulatory enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential or actual conflicts of interest. Reputational risk incurred in connection with conflicts of interest could negatively affect our business, strain our working relationships with regulators and government agencies, expose us to litigation and regulatory action, impact our ability to attract and retain clients, customers, trading counterparties, investors and employees and adversely affect our results of operations.

Certain of our executive officers are former executive officers and senior managers of Countrywide Financial Corporation, which has been the subject of various investigations and lawsuits and ongoing negative publicity. Any existing or future investigations, litigation or negative publicity involving Countrywide, or our officers as a result of their former association with that entity, may generate negative publicity or media attention for us or adversely impact our business.

Reputational risk, or the risk to our business, earnings and capital from negative public opinion, is inherent in our business and can result from a number of factors. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending and debt collection practices, corporate governance, and actions taken by government regulators and community organizations in response to those activities. Negative public opinion can also result from media coverage, whether accurate or not. These factors can tarnish or otherwise strain our working relationships with regulators and government agencies, expose us to litigation and regulatory action, negatively affect our ability to attract and retain customers, trading counterparties and employees and adversely affect our results of operations.

Challenges to the MERS® System could materially and adversely affect our business, results of operations and financial condition.

MERSCORP, Inc. is a privately held company that maintains an electronic registry, referred to as the MERS System, that tracks servicing rights and ownership of loans in the United States. Mortgage Electronic Registration Systems, Inc., or MERS, a wholly‑owned subsidiary of MERSCORP, Inc., can serve as a nominee for the owner of a mortgage loan and in that role initiate foreclosures or become the mortgagee of record for the loan in local land records. We may choose under certain circumstances to use MERS as a nominee. The MERS System is widely used by participants in the mortgage finance industry.

Several legal challenges in the courts and by governmental authorities have been made disputing MERS’s legal standing to act as nominee for lenders in mortgages and deeds of trust recorded in local land records. These challenges have focused public attention on MERS and on how loans are recorded in local land records. Although most legal decisions have accepted MERS as mortgagee, these challenges could result in delays and additional costs in commencing, prosecuting and completing foreclosure proceedings, conducting foreclosure sales of mortgaged properties, and submitting proofs of claim in borrower bankruptcy cases.

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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 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 recently 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

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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. See “We use estimates in determining the fair value of our MSRs, which are highly volatile assets with continually changing values. If our estimates of their value prove to be inaccurate, we may be required to write down the values of the MSRs which could adversely affect our financial condition and results of operations.” Furthermore, if we incur additional indebtedness to finance an acquisition, the acquired servicing portfolio may not be able to generate sufficient cash flowflows to service that additional indebtedness. Unsuitable or unsuccessful acquisitions could have a material adverse effect on our business, financial condition and results of operations.

 

Our prime servicing portfolio, which consists primarily of recently originated loans, has a limited performance history, which makes our future results of operations more difficult to predict.

The likelihood of mortgage delinquencies and defaults, and the associated risks to our business, including higher costs to service such loans and a greater risk that we may incur losses due to repurchase or indemnification demands, change as loans season, or increase with age. 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 2010 through 2014. As a result, we expect the delinquency rate and defaults in the prime servicing portfolio to increase in future periods as the portfolio seasons, but we cannot predict the magnitude of this impact on our results of operations. In addition, because most of the loans in our portfolios were originated after the recent financial crisis, it may be difficult to compare our business to our competitors and others that have weathered the economic difficulties in our industry over the last several years.

Risks Related to our Investment Management Segment

The investment management industry is intensely competitive.

The investment management industry is intensely competitive, with competition based on a variety of factors, including investment performance, management fee rates, reputation, and the continuity of the management team, client relationships and buying and selling arrangements with intermediaries. A number of factors, including the following, serve to increase our competitive risks:

·

a number of our competitors have greater financial, technical, marketing and other resources, more comprehensive name recognition and more personnel than we do;

·

potential competitors have a relatively low cost of entering the investment management industry;

·

some investors may prefer to invest with a manager that is not publicly traded based on the perception that a publicly traded investment manager may focus on the manager’s own growth to the detriment of asset performance for clients;

·

other industry participants, hedge funds and alternative investment managers may seek to recruit our investment professionals; and

·

some competitors charge lower fees for their investment services than we do.

If we are unable to compete effectively, our results of operations, financial condition and liquidity may be materially and adversely affected.

 

Market conditions could reduce the fair value of the assets that we manage, which would reduce our management and incentive fees.

 

Volatile market conditions could adversely affect our investment management segment in many ways, including by reducing the fair value of our assets under management, which could materially reduce our management fee and incentive fee revenues and adversely affect our financial condition. 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 decliningdecline 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 theour assets that we manage,under management, that decline in fair value could result in lowermaterially reduce our management fees and potentially lower incentive fees resulting from reduced performance under our management contracts with our Advised Entities.Entities and adversely affect our revenues. If our revenues decline without a commensurate reduction in our expenses, our net income will be reduced and our business, willfinancial condition and results of operations could be negativelymaterially and adversely affected.

 

We currently, and in the future may, manage assets for a small number of clients, the loss of any one of which could significantly reduce our management and incentive fees and have a material adverse effect on our results of operations.

We currently manage the assets of the Advised Entities, and the majority 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

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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, and could have a material and adverse effect on our results of operations and financial condition.

Also, because the management agreements we have entered into with the Investment Funds and PMT were negotiated between related parties without the benefit of the type of negotiations normally conducted with unaffiliated third parties, the terms of these agreements, including the fees payable to us, may prove to be more favorable to us than they would be if these agreements had been negotiated with unaffiliated third parties. Accordingly, we may not generate as much revenue from management agreements that we enter into with other third parties. In addition, the Investment Funds are limited‑life funds that were established in 2008 with commitment periods that ended in 2011 and terms that were extended through December 2017 with the possibility of two more one‑year extensions. Accordingly, base fees generated by the Investment Funds will continue to decline as the assets under management continue to run off.

The historical returns on the assets that we select and manage for our clients, 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 our Advised Entities. The investment performance that is achieved for the assets that we manage varies over time and the variance 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 our Advised Entities. A decline in the investment performance of our managed assets will also adversely affect our ability to attract and retain clients.

 

We currently, and in the future may, manage assets for a small number of clients, the loss of any one of which could significantly reduce our management and incentive fees and have a material adverse effect on our results of operations.

We currently manage the assets of the Advised Entities, and the majority of our management and incentive fees result from our management of PMT. The management contract that we have entered into with PMT cannot be terminated without cause (other than pursuant to cross‑termination provisions contained in other agreements that we have entered into with PMT) prior to February 1, 2017 without the payment of a termination fee. However, the termination of such contract and the loss of PMT as a client would significantly affect our investment management segment and negatively impact our management fees, and could have a material and adverse effect on our results of operations and financial condition. Also, because the management agreements we have entered into with the Investment Funds and PMT were negotiated between related parties without the benefit of the type of negotiations normally conducted with unaffiliated third parties, the terms of these agreements, including the fees payable to us, may prove to be more favorable to us than they would be if these agreements had been negotiated with unaffiliated third parties. Accordingly, we may not generate as much revenue from management agreements that we enter into with other third parties. In addition, the Investment Funds are limited‑life funds that were established in 2008 with commitment periods that ended in 2011 and terms that end in December 2016 with the possibility of three one‑year extensions. Accordingly, base fees generated by the Investment Funds will continue to decline as the assets under management run off.

Our failure to obtain consent of the Advised Entities in connection with certain dispositions by BlackRock and Highfields may cause us to breach agreements and lose management and incentive fees earned from such Advised Entities.

 

Because PCM is registered under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), the management agreements between us and the Advised Entities would be terminated upon an “assignment” of these agreements without consent, which assignment may be deemed to occur in the event that PCM was to experience a direct or indirect change of control. Because BlackRock and Highfields may be deemed to control us, a significant disposition by either of them of their interest in us could trigger an “assignment.” We cannot be certain that consents required to assignments of our investment management agreements will be obtained if such a change of control occurs.  “Assignment”An “assignment” of these agreements without consent could cause us to lose the management fees and incentive fees we earn from such Advised Entities.

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 and results of operations.

Our investment management segment is subject to extensive regulation in the United States, primarily at the federal level, including regulation of PCM by the SEC under the Advisers Act and regulation of PNMAC Mortgage Opportunity Fund LLC and PNMAC Mortgage Opportunity Fund, LP under the Investment Company Act. The requirements imposed by our regulators are designed primarily to ensure the integrity of the financial markets and to protect investors in our Advised Entities and are not designed to protect our stockholders. Consequently, these regulations often serve to limit our activities.

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These requirements relate to, among other things, fiduciary duties to clients, maintaining an effective compliance program, 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. Similar requirements apply to registered investment companies and to PCM’s management of those companies under the Investment Company Act which, among other things, regulates the relationship between a registered investment company and its investment adviser and prohibits or severely restricts principal transactions and joint transactions. Registered investment advisers and registered investment companies are also subject to routine periodic examinations by the staff of the SEC.

We also regularly rely on exemptions from various requirements of the Securities Act of 1933, as amended (the “Securities Act”), the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Investment Company Act and ERISA. These exemptions are sometimes highly complex and may in certain circumstances depend on compliance by third parties and service providers whom we do not control. If for any reason these exemptions were to be revoked or challenged or otherwise become unavailable to us, we could be subject to regulatory action or third‑party claims, and our business could be materially and adversely affected.

Our business combines the production and servicing of loans and investment management, which presents particular compliance challenges. For example, regulations applicable to our investment management business that are easily applied to traditional investments, such as stocks and bonds, may be more difficult to apply to a portfolio of loans, and the regulations applicable to our investment management business can require procedures that are uncommon, impractical or difficult in our loan production and servicing business.

The failure by us to comply with applicable laws or regulations could result in fines, suspensions of individual employees or other sanctions, which could have a material and adverse effect on our business, financial condition 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.

 

Changes in regulations applicable to our investment management segment could materially and adversely affect our business, financial condition and results of operations.

 

The legislative and regulatory environment in which we operate has undergone significant changes in the recent past. We believe that significant regulatory changes in the investment management industry are likely to continue, which is likely to subject industry participants to additional, more costly and generally more detailed regulation. New laws or regulations, or changes in the enforcement of existing laws or regulations, applicable to us and our clients may adversely affect our business. Our ability to function in this environment will depend on our ability to monitor and promptly react to legislative and regulatory changes.

 

Certain provisions of the Dodd‑Frank Act will, and other provisions may, increase regulatory burdens and reporting and related compliance costs on our investment management segment. The scope of many provisions of the Dodd‑Frank Act is being determined by implementing regulations, some of which will require lengthy proposal and promulgation periods. The SEC requires investment advisers such as us thatwho are registered with the SEC and advise one or more private funds to provide certain information about their funds and assets under management, including the

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amount of borrowings, concentration of ownership and other performance information. These filings have required, and will continue to require, significant investments in people, resources and systems to ensure timely and accurate reporting. The Dodd‑Frank Act will affect a broad range of market participants with whom we interact or may interact, including banks, non‑bank financial institutions, rating agencies, mortgage brokers, credit unions, insurance companies and broker‑dealers, and may cause us or our Advised Entities to become subject to further regulation by the Commodity Futures Trading Commission. Regulatory changes that will affect other market participants are likely to change the way in which we conduct business with our counterparties. The uncertainty regarding the continued implementation of the Dodd‑Frank Act and its impact on the investment management industry and us cannot be predicted at this time but will continue to be a risk for our business.

 

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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 proposed 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 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 and results of operations.

Our investment management segment is subject to extensive regulation in the United States, primarily at the federal level, including regulation of PCM by the SEC under the Advisers Act and regulation of PNMAC Mortgage Opportunity Fund LLC and PNMAC Mortgage Opportunity Fund, LP under the Investment Company Act. The requirements imposed by our regulators are designed primarily to ensure the integrity of the financial markets and to protect investors in our Advised Entities 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, maintaining an effective compliance program, 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. Similar requirements apply to registered investment companies and to PCM’s management of those companies under the Investment Company Act which, among other things, regulates the relationship between a registered investment company and its investment adviser and prohibits or severely restricts principal transactions and joint transactions. Registered investment advisers and registered investment companies are also subject to routine periodic examinations by the staff of the SEC.

We also regularly rely on exemptions and exclusions from various requirements of the Securities Act of 1933, as amended (the “Securities Act”), the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Investment Company Act and ERISA. These exemptions are sometimes highly complex and may in certain circumstances depend on compliance by third parties and service providers who we do not control. If for any reason these exemptions were to be revoked or challenged or otherwise become unavailable to us, we could be subject to regulatory action or third‑party claims, and our business could be materially and adversely affected.

Our business combines the production and servicing of loans and investment management, the combination of which presents particular compliance challenges. For example, regulations applicable to our investment management business that are easily applied to traditional investments, such as stocks and bonds, may be more difficult to apply to a portfolio of mortgage loans, and the regulations applicable to our investment management business can require procedures that are uncommon, impractical or difficult in our loan production and servicing businesses.

The failure by us to comply with applicable laws or regulations 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 and results of operations. Even if an investigation or proceeding did not result in a fine or sanction or the fine or sanction

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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 our own activities and the accounts that we manage, or in trying to appropriately allocate investment opportunities among ourselves and the accounts that we manage.

 

Pursuant to our management agreements with PMT and the Investment Funds, we are obligated to provide PMT and the Investment Funds with the services of our senior management team, and the members of that team are required to devote such time to us as is necessary and appropriate, commensurate with the level of activity of PMT and the Investment Funds. The members of our senior management team may have conflicts in allocating their time and services between our operations and the activities of PMT, the Investment Funds and other entities or accounts managed by us now or in the future.

 

Certain of the funds that we currently advise have, and certain of the funds that we may in the future advise may have, overlapping investment objectives, including funds which have different fee structures, and potential conflicts may arise with respect to our decisions regarding how to allocate investment opportunities among those funds. In addition, we and the other entities or accounts that we manage or will 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.

Our failure to deal appropriately with Any such potential or actual conflicts of interest could damage our reputation and adversely affect our business.

As we have expanded the scope of our businesses, we increasingly confront potential conflicts of interest relating to the investment activities that we manage for our clients. In addition, investors in our clients may perceive conflicts of interest regarding investment decisions for funds in which our executive officers, who have madematerially and may continue to make personal investments, are personally invested. Similarly, conflicts of interest may exist regarding decisions about the allocation of specific investment opportunities between funds in which we receive an allocation of profits as the general partner and funds in which we do not.

The SEC and certain regulators have increased their scrutiny of potential conflicts of interest, and as we expand the scope of our business and our client base, we must continue to monitor and address any conflicts between our interests and those of our clients. We have implemented procedures and controls to be followed when real or potential conflicts of interest arise, but it is possible that potential or perceived conflicts could give rise to the dissatisfaction of, or litigation by, investors in our client entities or regulatory enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential or actual conflicts of interest. Regulatory scrutiny, litigation or reputational risk incurred in connection with conflicts of interest could adversely affect our business, in a number of ways, including a reluctance of counterparties to do business with us,financial condition and may adversely affect our results of operations.

The investment management industry is intensely competitive.

The investment management industry is intensely competitive, with competition based on a variety of factors, including investment performance, management fee rates, continuity of the management team and client relationships, reputation and the continuity of buying and selling arrangements with intermediaries. A number of factors, including the following, serve to increase our competitive risks:

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·

a number of our competitors have greater financial, technical, marketing and other resources, more comprehensive name recognition and more personnel than we do;

·

potential competitors have a relatively low cost of entering the investment management industry;

·

some investors may prefer to invest with a manager that is not publicly traded based on the perception that a publicly traded investment manager may focus on the manager’s own growth to the detriment of asset performance for clients;

·

other industry participants, hedge funds and alternative investment managers may seek to recruit our investment professionals; and

·

some competitors charge lower fees for their investment services than we do.

If we are unable to compete effectively, our results of operations, financial condition and liquidity may be materially and adversely affected.

 

We are subject to third‑party litigation risk, which could result in significant liabilities and reputational harm to us.

 

In general, we may be exposed to the risk of litigation by investors in our client funds if our management of or advice to any Advised Entity, including any advice relating to wind-down strategies, 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 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 results of operations, financial condition and liquidity would be materially and adversely affected.

 

Risks Related to Our Business in General

 

We have experienced rapid growth, which may be difficult to sustain and which may place significant demands on our administrative, operational and financial resources.

 

Our rapid growth has caused, and if it continues will continue to cause, significant demands on our legal, accounting and operational infrastructure, and increased expenses. In addition, we are required to continuously develop our systems and infrastructure in response to the increasing sophistication of the investment management and mortgage lending markets and legal, accounting and regulatory developments relating to all of our business activities. Our future growth will depend, among other things, on our ability to maintain an operating platform and management systemsystems sufficient to address our growth and will require us to incur significant additional expenses and to commit additional senior management and operational resources. As a result, we face significant challenges in:

·

maintaining adequate financial and business controls;

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·

implementing new or updated information and financial systems and procedures; and

·

training, managing and appropriately sizing our work force and other components of our business on a timely and cost‑effective basis.

 

We may not be able to manage our expanding operations effectively and we may not be able to continue to grow, and any failure to do so could adversely affect our ability to generate revenue and control our expenses.

 

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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 that, among other things, provide us with financial, technology and other services to support our businesses. If our current counterparties and vendors were to stop providing services to us on acceptable terms, we may be unable to procure alternative services from other counterparties or vendors in a timely and efficient manner and on acceptable terms, or at all. 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 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 and results of operations.

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 risks related to our business, assets, and liabilities. 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.

Initiating new business activities or significantly expanding existing business activities may expose us to new risks and will increase our cost of doing business.

Initiating new business activities or significantly expanding existing business activities are two ways to grow our business 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.

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 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. Although we are an emerging growth company, we are electing to comply with new public company accounting standards. Our inability to timely prepare our financial statements in the future would likely adversely affect our share price significantly.

We could be harmed by misconduct or fraud that is difficult to detect.

We are exposed to risks relating to misconduct by our employees, contractors we use, or other third parties with whom we have relationships. For example, our employees could execute unauthorized transactions, use our assets improperly or without authorization, perform improper activities, use confidential information for improper purposes, or misrecord or otherwise try to hide improper activities from us. This type of misconduct could also relate to assets we manage for others through our investment advisory subsidiary, and can be difficult to detect. If not prevented or

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detected, misconduct by employees, contractors, or others could result in claims or enforcement actions against us, losses, or could seriously harm our reputation. Our controls may not be effective in detecting this type of activity.

If we fail to maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud. As a result, our stockholders could lose confidence in our financial results, which could harm our business and the market value of our common stock.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We may in the future discover areas of our internal controls that need improvement. Section 404 of the Sarbanes‑Oxley Act of 2002 (the “Sarbanes‑Oxley Act”), will require us to evaluate and report on our internal controls over financial reporting. We cannot be certain that we will be successful in continuing to maintain adequate control over our financial reporting and financial processes. Furthermore, as we rapidly grow our business, our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain effective. If we or our independent auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could result in a breach under one of our lending arrangements and/or reduce the market value of shares of our Class A common stock. Additionally, the existence of any material weakness or significant deficiency would 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.

The loss of the services of our senior managers could adversely affect our business.

 

The experience of our senior managers is a valuable asset to us. Our management team has significant experience in the mortgage loan production and servicing industry and the investment management industry. We do not maintain key person life insurance policies relating to our senior managers. The loss of the services of our senior managers for any reason could have a material adverse effect on our business.

 

Our business could suffer if we fail to attract and retain a highly skilled workforce.

 

Our future success will depend on our ability to identify, hire, develop, motivate and retain highly qualified personnel for all areas of our organization, in particular skilled managers, loan officers, underwriters, loan servicers and debt default specialists. Trained and experienced personnel are in high demand and may be in short supply in some areas. Many of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment. In addition, we invest significant time and expense in training our employees, which increases their value to competitors who may seek to recruit them. We may not be able to attract, develop and maintain an adequate skilled workforce necessary to operate our businesses and labor expenses may increase as a result of a shortage in the supply of qualified personnel. If we are unable to attract and retain such personnel, we may not be able to take advantage of acquisitions and other growth opportunities that may be presented to us and this could have a material adverse effect on our business, financial condition and results of operations.

 

We depend on counterparties and vendors, some of whom operate in other countries, 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, some of whom have significant operations outside of the United States.  These counterparties and vendors provide us with financial, technology and other services to support our businesses. If our current counterparties and vendors were to stop providing services to us on acceptable terms, we may be unable to procure alternative services from other counterparties or vendors in a timely and efficient manner and on similarly acceptable terms, or at all. 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 and results of operations.

Our failure to deal appropriately with various issues that may give rise to reputational risk, including conflicts of interest, legal and regulatory requirements, could cause harm to our business and adversely affect our earnings.

Maintaining our reputation is critical to attracting and retaining clients, customers, trading counterparties, investors and employees.  If we fail to deal with, or appear to fail to deal with various issues that may give rise to reputational risk, we could significantly harm our business prospects and earnings.  Such issues include, but are not limited to, conflicts of interest, legal and regulatory requirements, and any of the other risks discussed in this Item 1A. 

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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 our clients.  In addition, investors may perceive conflicts of interest regarding investment decisions and wind-down strategies for funds in which certain of our officers have made and may continue to make personal investments. Similarly, conflicts of interest may exist regarding decisions about the allocation of specific investment opportunities between funds in which we receive an allocation of profits as the general partner and funds in which we do not.

The SEC and certain regulators have increased their scrutiny of potential conflicts of interest, and as we experience growth in our businesses, we must continue to monitor and mitigate or otherwise address any conflicts between our interests and those of our clients. We have implemented procedures and controls to be followed when real or potential conflicts of interest arise, but it is possible that potential or perceived conflicts could give rise to the dissatisfaction of, or litigation by, investors in our Advised Entities or regulatory enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential or actual conflicts of interest. Reputational risk incurred in connection with conflicts of interest could negatively affect our business, strain our working relationships with regulators and government agencies, expose us to litigation and regulatory action, impact our ability to attract and retain clients, customers, trading counterparties, investors and employees and adversely affect our results of operations.

Reputational risk, or the risk to our business, earnings and capital from negative public opinion, is inherent in our business and can result from a number of factors. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending and debt collection practices, corporate governance, and actions taken by government regulators and community organizations in response to those activities. Negative public opinion can also result from social media and media coverage, whether accurate or not. These factors can tarnish or otherwise strain our working relationships with regulators and government agencies, expose us to litigation and regulatory action, negatively affect our ability to attract and retain customers, trading counterparties and employees and adversely affect our results of operations.

Initiating new business activities or significantly expanding existing business activities may expose us to new risks and will increase our cost of doing business.

Initiating new business activities or significantly expanding existing business activities, such as our entry into small balance multifamily lending, wholesale lending and non-delegated correspondent production, are ways to grow our businesses and respond to changing circumstances in our industry; however, they may expose us to new risks and regulatory compliance requirements. We cannot be certain that we will be able to manage these risks and compliance requirements effectively. Furthermore, our efforts may not succeed, and any revenues we earn from any new or expanded business initiative may not be sufficient to offset the initial and ongoing costs of that initiative, which would result in a loss with respect to that initiative.

Our risk management efforts may not be effective.

We could incur substantial losses and our business operations could be disrupted if we are unable to effectively identify, manage, monitor, and mitigate financial risks, such as credit risk, interest rate risk, prepayment risk, liquidity risk, and other market-related risks, as well as operational and legal risks related to our business, assets, and liabilities. We also are subject to various laws, regulations and rules that are not industry specific, including employment laws related to employee hiring and termination practices, health and safety laws, environmental laws and other federal, state and local laws, regulations and rules in the jurisdictions in which we operate. Our risk management policies, procedures, and techniques may not be sufficient to identify all of the risks to which we are exposed, mitigate the risks we have identified, or identify additional risks to which we may become subject in the future. Expansion of our business activities may also result in our being exposed to risks to which we have not previously been exposed or may increase our exposure to certain types of risks, and we may not effectively identify, manage, monitor, and mitigate these risks as our business activities change or increase.

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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.

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. Effective as of December 31, 2016, we no longer qualified as an emerging growth company.  Accordingly, 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 Class A 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 have a material adverse effect on our business, financial condition, results of operations, and ability to pay dividends.

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 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 will depend upon our ability to adapt to and implement technological changes.

 

Our mortgage loan production business isbusinesses 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 consumer direct lending and correspondent production processes are becoming more dependent upon technological advancement, such as our continued ability to process applications over the Internet, accept electronic signatures, provide process status updates instantly and other borrower‑ or counterparty‑expected conveniences. Maintaining and improving this new technology and becoming proficient with it may also require significant capital expenditures. As

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these requirements increase in the future, we will have to fully develop these technological capabilities to remain competitive and any failure to do so could have a material adverse effect on our business, financial condition and results of operations.

 

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Technology failures could damage our business operations and increase our costs, which could adversely affect our business, financial condition and results of operations.

 

The financial services industry as a whole is characterized by rapidly changing technologies, and system disruptions and failures caused by fire, power loss, telecommunications failures,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. Security breaches, acts of vandalism and developments in computer capabilities could result in a compromise or breach of the technology that we use to protect our customers’ personal information and transaction data.

Despite our efforts to ensure the integrity of our systems, it is possible that we may not be able to anticipate or implement effective preventive measures against all security breaches, especially because the methods of attack change frequently or are not recognized until 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. Our own employees, vendors, customers or other users of our systems also may, or may be induced to, disclose sensitive information for their own financial gain or in order to permit access to our data or that of our customers or clients. These risks may increase in the future as we continue to increase our reliance on the Internet and use of web‑based product offerings.

 

A successful penetration or circumvention of the security of our systems or a defect in the integrity of our systems or cybersecurity could cause serious negative consequences for our business, including regulatory sanctions, significant disruption of our operations, misappropriation of our confidential information or that of our customers, or damage to our computers or operating systems and to those of our customers and counterparties. 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, significant litigation exposure and harm to our reputation, any of which could have a material adverse effect on our business, financial condition and results of operations.

 

Cybersecurity risks and cyber incidents 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 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 technology has increased, so have the risks posed to its information systems, both internal and those provided byto us andby third-party service providers.  While we have implemented 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. The occurrence of any cyber intrusions or failures, interruptions and security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition and results of operations.

 

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Terrorist attacks and other acts of violence or war may materially and adversely affect the real estate industry generally and our business, financial condition 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. 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.

 

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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.

 

Risks Related to Our Organizational Structure

We will be required to pay the owners of PennyMac other than us for certain tax benefits that we may claim, and the amounts we may pay could be significant.

As described in “Organizational Structure,” we have entered into a tax receivable agreement with the owners of PennyMac other than us that provides for the payment by us to those owners of 85% of the tax benefits, if any, that we are deemed to realize under certain circumstances as a result of (i) increases in tax basis resulting from exchanges of Class A units of PennyMac and (ii) certain other tax benefits related to our entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

We expect that the payments that we may make under the tax receivable agreement will be substantial. It is possible that future transactions or events could increase or decrease the actual tax benefits realized and the corresponding tax receivable agreement payments. There may be a material negative effect on our liquidity if, as a result of timing discrepancies or otherwise, the payments under the tax receivable agreement exceed the actual benefits we realize in respect of the tax attributes subject to the tax receivable agreement or distributions to us by PennyMac are not sufficient to permit us to make payments under the tax receivable agreement after it has paid taxes. Furthermore, our obligations to make payments under the tax receivable agreement could make us a less attractive target for an acquisition, particularly in the case of an acquirer that cannot use some or all of the tax benefits that are deemed realized under the tax receivable agreement. The payments under the tax receivable agreement are not conditioned upon the continued ownership of us by owners of PennyMac.

Our only material asset is our interest in PennyMac and its subsidiaries, and we are accordingly dependent upon distributions from PennyMac and its subsidiaries 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 ownership of Class A units of PennyMac. We have no independent means of generating revenue. We are required to pay tax on our allocable share of the taxable income of PennyMac and 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 law or regulation 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.

In certain cases, payments under the tax receivable agreement to owners of PennyMac other than us may be accelerated and/or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the tax receivable agreement.

The tax receivable agreement provides that upon certain mergers, asset sales, other forms of business combinations or other changes of control, or if, at any time, we elect an early termination of the tax receivable agreement, our (or our successor’s) obligations with respect to exchanged or acquired Class A units of PennyMac (whether exchanged or acquired before or after such transaction) would be based on certain assumptions, including that we would have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering into the tax receivable agreement. As a result, we could be required to make payments under the tax receivable agreement that differ from the percentage specified in the tax receivable agreement of the actual benefits that we realize in respect of the tax attributes that are subject to the tax receivable agreement. Also, if

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we elect to terminate the tax receivable agreement early, we would be required to make an immediate payment equal to the present value of the anticipated future tax benefits, which upfront payment may be made years in advance of the actual realization of such future benefits (if any). In these situations, our obligations under the tax receivable agreement could have a substantial negative impact on our liquidity, as well as our attractiveness as a target for an acquisition. In addition, we may not be able to finance our obligations under the tax receivable agreement.

Payments under the tax receivable agreement will be based on the tax reporting positions that we determine. Although we are not aware of any issue that would cause the Internal Revenue Service, or IRS, to challenge a tax basis increase, we will not be reimbursed for any payments previously made under the tax receivable agreement. As a result, in certain circumstances, payments could be made under the tax receivable agreement in excess of the benefits that we actually realize in respect of (i) increases in tax basis resulting from exchanges of Class A units of PennyMac and (ii) certain other tax benefits related to our entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.

 

Owners of PennyMac other than us will initially be able to significantly influence the outcome of votes of our outstanding shares of Class A common stock, and their interests may differ from those of our public stockholders.

 

Pursuant to separate stockholder agreements with BlackRock and Highfields, each of BlackRock and Highfields has the right to nominate one or two individuals for election to our board of directors, depending on the percentage of the voting power of our outstanding shares of Class A and Class B 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, and the limited liability company agreement of PennyMac requires the consent of BlackRock and Highfields for us to conduct certain activities. 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 will initially 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 Class A common stock as part of a sale of our company and might ultimately affect the market price of our Class A common stock.

 

In addition, because they hold their ownership interest in our business through PennyMac, rather than through the public company, these owners may have conflicting interests with holders of shares of our Class A common stock. For example, other owners of PennyMac may have different tax positions from us which could influence their decisions regarding whether and when to dispose of assets, whether and when to incur new or refinance existing indebtedness, especially in light of the existence of the tax receivable agreement that we entered into in connection with the initial public offering of our Class A common stock, and whether and when we should terminate the tax receivable agreement and accelerate its obligations thereunder. Further, the structuring of future transactions may take into consideration these owners’ tax or other considerations even where no similar benefit would accrue to us. See “Certain Relationships

We will be required to pay the owners of PennyMac other than us for certain tax benefits that we may claim, and Related Party Transactions—Tax Receivable Agreement.”the amounts we may pay could be significant.

 

As described in “Organizational Structure,” we have entered into a tax receivable agreement with the owners of PennyMac other than us that provides for the payment by us to those owners of 85% of the tax benefits, if any, that we are deemed to realize under certain circumstances as a result of (i) increases in tax basis resulting from exchanges of Class A units of PennyMac for shares of our Class A common stock and (ii) certain other tax benefits related to our

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entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.

We expect that the payments that we may make under the tax receivable agreement will be substantial. It is possible that future transactions or events could increase or decrease the actual tax benefits realized and the corresponding tax receivable agreement payments. There may be a material negative effect on our liquidity if, as a result of timing discrepancies or otherwise, the payments under the tax receivable agreement exceed the actual benefits we realize in respect of the tax attributes subject to the tax receivable agreement or distributions to us by PennyMac are not sufficient to permit us to make payments under the tax receivable agreement after we have paid our taxes. Furthermore, our obligations to make payments under the tax receivable agreement could make us a less attractive target for an acquisition, particularly in the case of an acquirer that cannot use some or all of the tax benefits that are deemed realized under the tax receivable agreement. The payments under the tax receivable agreement are not conditioned upon the continued ownership of us by owners of PennyMac.

In certain cases, payments under the tax receivable agreement to owners of PennyMac other than us may be accelerated and/or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the tax receivable agreement.

The tax receivable agreement provides that upon certain mergers, asset sales, other forms of business combinations or other changes of control, or if, at any time, we elect an early termination of the tax receivable agreement, our (or our successor’s) obligations with respect to exchanged or acquired Class A units of PennyMac (whether exchanged or acquired before or after such transaction) would be based on certain assumptions, including that we would have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering into the tax receivable agreement. As a result, we could be required to make payments under the tax receivable agreement that differ from the percentage specified in the tax receivable agreement of the actual benefits that we realize in respect of the tax attributes that are subject to the tax receivable agreement. Also, if we elect to terminate the tax receivable agreement early, we would be required to make an immediate payment equal to the present value of the anticipated future tax benefits, which upfront payment may be made years in advance of the actual realization of such future benefits (if any). In these situations, our obligations under the tax receivable agreement could have a substantial negative impact on our liquidity, as well as our attractiveness as a target for an acquisition. In addition, we may not be able to finance our obligations under the tax receivable agreement.

Payments under the tax receivable agreement will be based on the tax reporting positions that we determine. Although we are not aware of any issue that would cause the Internal Revenue Service, or IRS, to challenge a tax basis increase, we will not be reimbursed for any payments previously made under the tax receivable agreement. As a result, in certain circumstances, payments could be made under the tax receivable agreement in excess of the tax benefits that we actually realize in respect of (i) increases in tax basis resulting from exchanges of Class A units of PennyMac for shares of our Class A common stock and (ii) certain other tax benefits related to our entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.

Our only material asset is our interest in PennyMac and its subsidiaries, and we are accordingly dependent upon distributions from PennyMac and its subsidiaries 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 ownership of Class A units of PennyMac. We have no independent means of generating revenue. We are required to pay tax on our allocable share of the taxable income of PennyMac and 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 law or regulation 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.

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We may not pay dividends on our common stock in the foreseeable future.

 

We are entitled to receive a pro rata portion of the tax distributions made by PennyMac. The cash received from such distributions will first be used to satisfy any of our tax liabilities and then to make any payments under the tax receivable agreement with the owners of PennyMac other than us. The declaration, amount and payment of any dividends on shares of Class A common stock with respect to any remaining excess cash will be at the sole discretion of our board of directors. Our board of directors may take into account general and economic conditions, our financial condition and operating results, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us, and such other factors as our board of directors may deem relevant. We may also enter into credit agreements or other borrowing arrangements in the future that restrict or limit our ability to pay cash dividends on our common stock. Accordingly, we may not pay any dividends on our common stock in the foreseeable future.

 

Anti‑takeover provisions in our charter documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.

37Our 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, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of Class A common stock;

Table

·

prohibit stockholder action by written consent unless the matter as to which action is being taken has been approved by our board of directors, which requires all stockholder actions regarding matters not approved by our board of directors to be taken at a meeting of our stockholders;

·

provide that our board of directors is expressly authorized to make, alter, or repeal our bylaws (provided that, if that action adversely affects BlackRock or Highfields when that entity, together with its affiliates, holds at least 5% of the voting power of our outstanding shares of capital stock, our stockholder agreements provide that such action must be approved by that entity);

·

establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings; and

·

prevent us from selling substantially all of our assets or completing a merger or other business combination that constitutes a change of control without the approval of a majority of those of our directors who are not also our officers.

These anti‑takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of Contentsour company, including actions that our stockholders may deem advantageous, or negatively affect the trading price of our Class A common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.

Our certificate of incorporation contains provisions renouncing our interest and expectancy in certain corporate opportunities identified by or presented to BlackRock and Highfields.

 

BlackRock, Highfields and their respective affiliates are in the business of providing capital to growing companies, and may acquire interests in businesses that directly or indirectly compete with certain portions of our business. Our certificate of incorporation provides that neither BlackRock nor Highfields nor their respective affiliates has any duty to refrain from (i) engaging, directly or indirectly, in a corporate opportunity in the same or similar lines of business in which we now engage or propose to engage, or (ii) doing business with any of our clients, customers or

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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, 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.

 

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, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of Class A common stock;

·

prohibit stockholder action by written consent unless the matter as to which action is being taken has been approved by our board of directors, which requires all stockholder actions regarding matters not approved by our board of directors to be taken at a meeting of our stockholders;

·

provide that our board of directors is expressly authorized to make, alter, or repeal our bylaws (provided that, if that action adversely affects BlackRock or Highfields when that entity, together with its affiliates, holds at least 5% of the voting power of our outstanding shares of capital stock, our stockholder agreements provide that such action must be approved by that entity);

·

establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings; and

·

prevent us from selling substantially all of our assets or completing a merger or other business combination that constitutes a change of control without the approval of a majority of those of our directors who are not also our officers.

These anti‑takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, including actions that our stockholders may deem advantageous, or negatively affect the trading price of our Class A common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.

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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 have a material adverse effect onadversely affect our business and financial condition.

 

Risks Related to Our Class A Common Stock

We are an “emerging growth company” and as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.

We are an “emerging growth company” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes‑Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of the initial public offering of our Class A common stock, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our Class A common stock that is held by non‑affiliates exceeds $700.0 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non‑convertible debt during the prior three‑year period.

Under Section 107(b) of the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

The market price and trading volume of our Class A common stock may be volatile, which could result in rapid and substantial losses for our stockholders.

 

The market price of our Class A 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 Class A common stock may fluctuate and cause significant price variations to occur. IfBecause the trading volume of our Class A common stock is relatively low, even in times of fluctuation, certain investors may be unwilling or prohibited as a matter of policy from making investments. Further, if the market price of our Class A common stock declines significantly, you may be unable to resell your shares at or above your purchase price, if at all. The market price of our Class A common stock may decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our Class A common stock include:

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variations in our quarterly or annual operating results;

·

changes in our earnings estimates (if provided) or differences between our actual financial and operating results and those expected by investors and analysts;

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the contents of published research reports about us or our industry or the failure of securities analysts to cover our Class A common stock;

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additions or departures of key management personnel;

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any increased indebtedness we may incur in the future;

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·

announcements by us or others and developments affecting us;

·

actions by institutional stockholders;

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litigation and governmental investigations;

·

changes in market valuations of similar companies;

·

speculation or reports by the press or investment community with respect to us or our industry in general;

·

increases in market interest rates that may lead purchasers of our shares to demand a higher yield;

·

announcements by us or our competitors of significant contracts, acquisitions, dispositions, strategic relationships, joint ventures or capital commitments; and

·

general market, political and economic conditions, including any such conditions and local conditions in the markets in which our customers are located.

 

These broad market and industry factors may decrease the market price of our Class A common stock, regardless of our actual operating performance. The stock market in general has from time to time experienced extreme price and volume fluctuations, including in recent months. In addition, in the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

 

The market price of our Class A common stock could be negatively affected by sales of substantial amounts of our Class A common stock in the public markets.

Sales of substantial numbers of shares of our Class A common stock, including shares issued upon the exchange of Class A Units of PennyMac, in the public market, or the perception that such sales could occur, could adversely affect the market price of our Class A common stock and could impair our future ability to raise capital through the sale of equity securities or equity‑related securities.

As of December 31, 2016, we have a total of 22,426,779 shares of Class A common stock outstanding. The issuance and sale (or resale) of up to 46,003,552 additional shares of our Class A common stock have been registered under the Securities Act so those shares, upon issuance, will be freely tradable without restriction or further registration under the Securities Act.

A decline in the price of our Class A common stock might impede our ability to raise capital through the issuance of additional Class A common stock or other equity securities.

The future issuance of additional Class A common stock in connection with our incentive plans, acquisitions or otherwise will dilute all other stockholdings.

As of December 31, 2016, we have an aggregate of 19,956,098 shares of Class A common stock authorized and remaining available for future issuance under our 2013 Equity Incentive Plan or upon the exchange of Class A Units of PennyMac. We may issue all of these shares of Class A 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 Class A common stock in connection with these acquisitions. Any Class A 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 Class A common stock.

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Future offerings of debt or equity securities by us may adversely affect the market price of our Class A common stock.

 

In the future, we may attempt to obtain financing or to further increase our capital resources by issuing additional shares of our Class A common stock or offering debt or other equity securities, including commercial paper, medium‑term notes, senior or subordinated notes, debt securities convertible into equity or shares of preferred stock. In particular, we intend to seek opportunities to acquire MSR portfolios. Future acquisitions could require substantial additional capital in excess of cash from operations. We would expect to obtain the capital required for acquisitions through a combination of additional issuances of equity, corporate indebtedness, asset‑backed acquisition financing and/or cash from operations.

 

Issuing additional shares of our Class A 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 Class A common stock or both. Upon liquidation, holders of such debt securities and preferred shares, if issued, and lenders with respect to other borrowings would receive a distribution of our available assets prior to the holders of our Class A common stock. Debt securities convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain events may increase the number of equity securities issuable upon conversion. Preferred shares, if issued, could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our Class A common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, which may adversely affect the amount, timing or nature of our future offerings. In addition, the limited liability company agreement of PennyMac provides that new classes of units or other equity interests of PennyMac may be issued to third parties other than us only with the approval of BlackRock and Highfields as long as they, or any of their affiliates, hold any Class A units of PennyMac. Any such issuance will dilute the ownership of holders of our Class A common stock in substantially all of our operating assets. Thus, holders of our Class A common stock bear the risk that our future offerings, including any future offerings by PennyMac, may reduce the market price of our Class A common stock and dilute their stockholdings in us.

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The market price of our Class A common stock could be negatively affected by sales of substantial amounts of our Class A common stock in the public markets.

Sales of substantial numbers of shares of our Class A common stock, including shares issued upon the exchange of Class A Units of PennyMac, in the public market, or the perception that such sales could occur, could adversely affect the market price of our Class A common stock and could impair our future ability to raise capital through the sale of equity securities or equity‑related securities.

As of December 31, 2014, we have a total of 21,577,686 shares of Class A common stock outstanding. The issuance and sale (or resale) of up to 55,076,111 additional shares of our Class A common stock have been registered under the Securities Act so those shares, upon issuance, will be freely tradable without restriction or further registration under the Securities Act.

A decline in the price of our Class A common stock might impede our ability to raise capital through the issuance of additional Class A common stock or other equity securities.

The future issuance of additional Class A common stock in connection with our incentive plans, acquisitions or otherwise will dilute all other stockholdings.

As of December 31, 2014, we have an aggregate of 21,166,481 shares of Class A common stock authorized and remaining available for future issuance under our 2013 Equity Incentive Plan or upon the exchange of Class A Units of PennyMac. We may issue all of these shares of Class A 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 Class A common stock in connection with these acquisitions. Any Class A 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 Class A common stock.

Item 1B.  UnresolvedUnresolved Staff Comments

 

None.

 

Item 2.    Properties

 

OurIn 2016, we relocated our corporate offices are located at 6101 Condor Drive, Moorpark, California 93021, into a 142,00060,000 square foot leased facility. This location, along with an adjacent propertyfacility located at 5898 Condor Drive,3043 Townsgate Road, Westlake Village, California 91361. Our primary loan servicing operation remains in Moorpark, California 93021, house our primary mortgage banking and investment management operations as well as our administrative offices.CA.

 

We lease elevenseveral additional locations throughout the country generally housing loan production and servicing activities. Our consumer direct lending business occupies a 36,000 square feetfoot facility in Pasadena, CA. OurLoan servicing and its call center operations and loan processing occupiesoccupy a 116,000 square feetfoot facility in Fort Worth, TX, and 30,000a 75,000 square feetfoot facility in Sacramento, CA.Plano, TX. We have six loan production branches located in Sacramento, CA, Honolulu, HI, Eagan, MN, Henderson, NV, Honolulu, HI, Kansas City, MO, Henderson, NV and Seattle, WA and Alpharetta, GA devoted to loan production. Our newWA. PennyMac’s commercial real estate finance business is housed in a leased facility in Irvine, CA, and we lease a 20,000 square feetfoot facility in Tampa, FL devoted to our correspondent production business.activities.​ In the fourth quarter of 2016, much of our California-based mortgage fulfillment division relocated from a property in Moorpark, CA to a newly leased 60,000 square foot facility in close proximity to our corporate offices. Our information technology division is housed in a 50,000 square foot facility in Agoura Hills, CA.  ​

 

The financial commitments of our leases are immaterial to the scope of our operations.

 

Item 3.    Legal Proceedings

 

From time to time, we may be involved in various legal proceedings,actions, claims and actionsproceedings, arising in the ordinary course of business. As of December 31, 2014,2016, we were not involved in any suchmaterial legal proceedings,actions, claims or actions that management believes would be reasonably likely to have a material adverse effect on us.proceedings.

 

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Item 4.    Mine Safety Disclosures

 

Not applicable.

 

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PART II

 

Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Our shares of Class A common stock began trading publicly on May 9, 2013 and are listed on the New York Stock Exchange (Symbol: PFSI). As of March 9, 2015,2, 2017, our shares of Class A common stock were held by 2,0103,466 holders of record. The following table sets forth the high and low sales prices (as reported by the New York Stock Exchange) for our shares of Class A common stock:

 

For the year ended December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2016

 

 

 

 

                    

 

 

                    

 

Cash

 

 

 

Stock price

 

dividends

 

Period Ended

    

High

    

Low

    

declared

 

March 31, 2016

 

$

15.38

 

$

10.48

 

$

 —

 

June 30, 2016

 

$

14.43

 

$

10.96

 

$

 —

 

September 30, 2016

 

$

18.13

 

$

11.47

 

$

 —

 

December 31, 2016

 

$

19.35

 

$

15.73

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2014

 

 

 

                    

 

 

                    

 

Cash

 

 

Stock price

 

dividends

Period Ended

    

High

    

Low

    

declared

March 31, 2014

 

$

18.68 

 

$

15.91 

 

$

 —

June 30, 2014

 

$

17.80 

 

$

15.03 

 

$

 —

September 30, 2014

 

$

15.69 

 

$

14.54 

 

$

 —

December 31, 2014

 

$

17.48 

 

$

14.18 

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2015

 

 

 

 

                    

 

 

                    

 

Cash

 

 

 

Stock price

 

dividends

 

Period Ended

    

High

    

Low

    

declared

 

March 31, 2015

 

$

18.98

 

$

16.50

 

$

 —

 

June 30, 2015

 

$

19.69

 

$

16.86

 

$

 —

 

September 30, 2015

 

$

18.56

 

$

15.90

 

$

 —

 

December 31, 2015

 

$

17.25

 

$

15.19

 

$

 —

 

 

For the year ended December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2013

 

 

 

                    

 

 

                    

 

Cash

 

 

Stock price

 

dividends

Period Ended

    

High

    

Low

    

declared

June 30, 2013

 

$

23.33 

 

$

18.15 

 

$

 —

September 30, 2013

 

$

21.35 

 

$

15.79 

 

$

 —

December 31, 2013

 

$

18.86 

 

$

15.75 

 

$

 —

 

We have not established a minimum dividend payment level and our ability to pay dividends may be adversely affected for the reasons described in Item 1A of this Report in the section entitled Risk Factors. All distributions are made at the discretion of our board of directors and depend on our earnings, our financial condition and such other factors as our board of directors may deem relevant from time to time.

 

Unregistered Sales of Equity Securities and Use of Proceeds

There were no sales of unregistered equity securities during the year ended December 31, 2016.

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 theour 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;

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·

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.

 

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The following table provides information as of December 31, 20142016 concerning our shares of Class A common stock authorized for issuance under our equity incentive plan.

                                                                                          

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

 

 

(b)

 

(c)

 

 

(a)

 

 

(b)

 

(c)

 

 

 

 

 

 

 

Number of securities 

 

 

 

 

 

 

 

Number of securities 

 

 

 

 

 

 

 

remaining available for 

 

 

 

 

 

 

 

remaining available for 

 

 

 

 

 

 

 

future issuance under 

 

 

 

 

 

 

 

future issuance under 

 

 

Number of securities to

 

 

Weighted average

 

equity compensation 

 

 

Number of securities to

 

Weighted average

 

equity compensation 

 

 

be issued upon exercise of 

 

 

exercise price of 

 

plans (excluding 

 

 

be issued upon exercise of 

 

exercise price of 

 

plans (excluding 

 

 

outstanding options,

 

 

outstanding options, 

 

securities reflected in 

 

 

outstanding options,

 

outstanding options, 

 

securities reflected in 

 

Plan category

    

warrants and rights

    

 

warrants and rights (3) 

    

column (a)) (4)

 

    

warrants and rights

    

warrants and rights (3)

    

column (a)) (4)

 

Equity compensation plans approved by security holders (1)

 

2,627,018 

 

$

18.23 

 

21,166,481 

 

 

5,594,769

 

$

15.81

 

19,956,098

 

Equity compensation plans not approved by security holders (2)

 

 —

 

$

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

Total

 

2,627,018 

 

$

18.23 

 

21,166,481 

 

 

5,594,769

 

$

15.81

 

19,956,098

 


(1)

Represents our 2013 Equity Incentive Plan.

(2)

We do not have any equity plans that have not been approved by our stockholders.

(3)

The weighted average exercise price set forth in this column relates only to 1,167,1812,738,276 stock options outstanding under our 2013 Equity Incentive Plan. The remaining securities included in column (a) of this table are performance‑based RSUsrestricted stock units and time‑based RSUs,restricted stock units, for which no exercise price applies.

(4)

This number includes a specific pool of 18,597,66117,977,169 shares of common stock authorized for issuance upon the future exchange of outstanding Class A units of PennyMac that were originally issued pursuant to compensatory arrangements. It also includes a general pool of 2,554,0071,978,929 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, 20142016 pursuant to the foregoing formula was 1,322,024.

 

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Item 6.  SelectedSelected 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 (in thousands, except for earnings per share amounts). Note that theus. The condensed consolidated statements of income data for the years ended December 31, 2014, 20132016, 2015 and 20122014 and the condensed consolidated balance sheets data at December 31, 20142016, and 20132015 have been derived from our audited financial statements included elsewhere in this Report. The condensed consolidated statements of income data and other data for the years ended December 31, 20112013 and 20102012 and the

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Table of Contents

condensed consolidated balance sheets data at December 31, 2012, 20112014, 2013 and 20102012 have been derived from theour Company’s audited consolidated financial statements that are not included in this Report.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

    

2016

    

2015

    

2014

    

2013

    

2012

 

 

 

(in thousands, except per share data)

 

Condensed Consolidated Statements of Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

                    

 

 

                    

 

 

                    

 

 

                    

 

 

                    

 

Net gains on mortgage loans held for sale

 

$

531,780

 

$

320,715

 

$

167,024

 

$

138,013

 

$

118,170

 

Loan origination fees

 

 

125,534

 

 

91,520

 

 

41,576

 

 

23,575

 

 

9,634

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

86,465

 

 

58,607

 

 

48,719

 

 

79,712

 

 

62,906

 

Net mortgage loan servicing fees

 

 

185,466

 

 

229,543

 

 

216,919

 

 

90,010

 

 

40,105

 

Management fees and Carried Interest

 

 

23,726

 

 

30,865

 

 

48,664

 

 

53,749

 

 

32,272

 

Net interest expense

 

 

(25,079)

 

 

(19,382)

 

 

(9,486)

 

 

(1,041)

 

 

(1,525)

 

Other

 

 

3,995

 

 

1,242

 

 

4,861

 

 

2,541

 

 

3,524

 

Total net revenue

 

 

931,887

 

 

713,110

 

 

518,277

 

 

386,559

 

 

265,086

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

 

342,153

 

 

274,262

 

 

190,707

 

 

148,576

 

 

124,014

 

Servicing

 

 

85,857

 

 

68,085

 

 

48,430

 

 

7,028

 

 

3,642

 

Other

 

 

120,794

 

 

91,570

 

 

56,107

 

 

48,829

 

 

19,107

 

Total expenses

 

 

548,804

 

 

433,917

 

 

295,244

 

 

204,433

 

 

146,763

 

Income before provision for income taxes

 

 

383,083

 

 

279,193

 

 

223,033

 

 

182,126

 

 

118,323

 

Provision for income taxes

 

 

46,103

 

 

31,635

 

 

26,722

 

 

9,961

 

 

 —

 

Net income

 

 

336,980

 

 

247,558

 

 

196,311

 

 

172,165

 

$

118,323

 

Less: Net income attributable to noncontrolling interest

 

 

270,901

 

 

200,330

 

 

159,469

 

 

157,765

 

 

 

 

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

 

$

66,079

 

$

47,228

 

$

36,842

 

$

14,400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans held for sale at fair value

 

$

2,172,815

 

$

1,101,204

 

$

1,147,884

 

$

531,004

 

$

448,384

 

Mortgage servicing rights

 

 

1,627,672

 

 

1,411,935

 

 

730,828

 

 

483,664

 

 

108,975

 

Carried Interest due from Investment Funds

 

 

70,906

 

 

69,926

 

 

67,298

 

 

61,142

 

 

47,723

 

Servicing advances

 

 

348,306

 

 

299,354

 

 

228,630

 

 

154,328

 

 

93,152

 

Other

 

 

914,203

 

 

622,875

 

 

332,046

 

 

354,337

 

 

133,929

 

Total assets

 

$

5,133,902

 

$

3,505,294

 

$

2,506,686

 

$

1,584,475

 

$

832,163

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets sold under agreements to repurchase

 

$

1,735,114

 

$

1,166,731

 

$

822,252

 

$

471,592

 

$

393,534

 

Mortgage loan participation and sale agreements

 

 

671,426

 

 

234,872

 

 

143,568

 

 

 —

 

 

 —

 

Notes payable

 

 

150,942

 

 

61,136

 

 

146,855

 

 

52,154

 

 

53,013

 

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

 

 

288,669

 

 

412,425

 

 

191,166

 

 

138,723

 

 

 —

 

Other

 

 

888,395

 

 

567,780

 

 

395,579

 

 

292,802

 

 

123,866

 

Total liabilities

 

 

3,734,546

 

 

2,442,944

 

 

1,699,420

 

 

955,271

 

 

570,413

 

Stockholders' equity

 

 

1,399,356

 

 

1,062,350

 

 

807,266

 

 

629,204

 

 

261,750

 

Total liabilities and stockholders' equity

 

$

5,133,902

 

$

3,505,294

 

$

2,506,686

 

$

1,584,475

 

$

832,163

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share of Common Stock (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

2.98

 

$

2.17

 

$

1.73

 

$

0.83

 

 

 

 

Diluted

 

$

2.94

 

$

2.17

 

$

1.73

 

$

0.82

 

 

 

 

Year end Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Book value per share

 

$

15.49

 

$

12.32

 

$

9.92

 

$

8.04

 

 

 

 

Share price

 

$

16.65

 

$

15.36

 

$

17.30

 

$

17.55

 

 

 

 

45


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

    

2014

    

2013

    

2012

    

2011

    

2010

 

 

 

(in thousands, except per share data)

 

Condensed Consolidated Statements of Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

                    

 

 

                    

 

 

                    

 

 

                    

 

 

                    

 

Net gains on mortgage loans held for sale

 

$

167,024 

 

$

138,013 

 

$

118,170 

 

$

13,029 

 

$

2,008 

 

Loan origination fees

 

 

41,576 

 

 

23,575 

 

 

9,634 

 

 

669 

 

 

734 

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

48,719 

 

 

79,712 

 

 

62,906 

 

 

1,747 

 

 

 —

 

Net servicing fees

 

 

216,919 

 

 

90,010 

 

 

40,105 

 

 

28,667 

 

 

26,001 

 

Management fees and Carried Interest

 

 

42,508 

 

 

53,749 

 

 

32,272 

 

 

29,279 

 

 

39,475 

 

Net interest expense

 

 

(9,486)

 

 

(1,041)

 

 

(1,525)

 

 

(343)

 

 

(595)

 

Other

 

 

11,017 

 

 

2,541 

 

 

3,524 

 

 

1,736 

 

 

816 

 

Total net revenue

 

 

518,277 

 

 

386,559 

 

 

265,086 

 

 

74,784 

 

 

68,439 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

 

190,707 

 

 

148,576 

 

 

124,014 

 

 

47,479 

 

 

25,412 

 

Servicing

 

 

48,430 

 

 

7,028 

 

 

3,642 

 

 

2,344 

 

 

2,167 

 

Other

 

 

56,107 

 

 

48,829 

 

 

19,107 

 

 

10,262 

 

 

7,818 

 

Total expenses

 

 

295,244 

 

 

204,433 

 

 

146,763 

 

 

60,085 

 

 

35,397 

 

Income before provision for income taxes

 

 

223,033 

 

 

182,126 

 

 

118,323 

 

 

14,699 

 

 

33,042 

 

Provision for income taxes

 

 

26,722 

 

 

9,961 

 

 

 —

 

 

 —

 

 

 —

 

Net income

 

 

196,311 

 

 

172,165 

 

$

118,323 

 

$

14,699 

 

$

33,042 

 

Less: Net income attributable to noncontrolling interest

 

 

159,469 

 

 

157,765 

 

 

 

 

 

 

 

 

 

 

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

 

$

36,842 

 

$

14,400 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans held for sale at fair value

 

$

1,147,884 

 

$

531,004 

 

$

448,384 

 

$

89,857 

 

$

14,720 

 

Mortgage servicing rights

 

 

730,828 

 

 

483,664 

 

 

108,975 

 

 

32,124 

 

 

31,957 

 

Carried Interest due from Investment Funds

 

 

67,298 

 

 

61,142 

 

 

47,723 

 

 

37,250 

 

 

24,654 

 

Servicing advances

 

 

228,630 

 

 

154,328 

 

 

93,152 

 

 

63,565 

 

 

22,811 

 

Other assets

 

 

332,485 

 

 

354,337 

 

 

133,929 

 

 

66,485 

 

 

34,260 

 

Total assets

 

$

2,507,125 

 

$

1,584,475 

 

$

832,163 

 

$

289,281 

 

$

128,402 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets sold under agreements to repurchase

 

$

822,621 

 

$

471,592 

 

$

393,534 

 

$

77,700 

 

$

13,289 

 

Note payable

 

 

146,855 

 

 

52,154 

 

 

53,013 

 

 

18,602 

 

 

3,499 

 

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

 

 

191,166 

 

 

138,723 

 

 

 —

 

 

 —

 

 

 —

 

Other liabilities

 

 

539,217 

 

 

292,802 

 

 

123,866 

 

 

69,064 

 

 

21,645 

 

Total liabilities

 

 

1,699,859 

 

 

955,271 

 

 

570,413 

 

 

165,366 

 

 

38,433 

 

Stockholders' equity

 

 

807,266 

 

 

629,204 

 

 

261,750 

 

 

123,915 

 

 

89,969 

 

Total liabilities and stockholders' equity

 

$

2,507,125 

 

$

1,584,475 

 

$

832,163 

 

$

289,281 

 

$

128,402 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share of Common Stock (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.73 

 

$

0.83 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

1.73 

 

$

0.82 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share price at year end

 

$

17.30 

 

$

17.55 

 

 

 

 

 

 

 

 

 

 

Table of Contents


(1)

After the Companywe completed itsour IPO on May 14, 2013, the earnings per share of common stock calculation became applicable.

 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Observations on Current Market Conditions

 

Our business is affected by macroeconomic conditions in the United States, including economic growth, unemployment rates, the residential housing market and interest rate levels and expectations. The U.S. economy continues its pattern of steady growthto grow, albeit at a modest pace, as reflected in recent economic data. During 2014,2016, U.S. real U.S. gross domestic

45


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product expanded at an annual rate of 2.4%1.9% compared to a revised 2.2% annual rate0.9% for 2013.2015. The national seasonally adjusted unemployment rate was 4.7% at December 31, 2016, 5.0% at December 31, 2015 and 5.6% at December 31, 2014 compared to 6.7% at December 31, 2013 and 7.9% at December 31, 2012, respectively.2014. Delinquency rates on residential real estate loans remain somewhat elevated compared to historical rates, but have been steadily declining. As reported by the Federal Reserve Bank, during the third quarter of 2014,2016, the delinquency rate on residential real estate loans held by commercial banks was 6.6%4.3%, a reduction from 8.3%5.2% during the thirdfourth quarter of 2013.2015.

 

Residential real estate activity appears to be stabilizing.remains strong. The seasonally adjusted annual rate of existing home sales for December 20142016 was 3.1% lower1.5% higher than for December 2013,2015, and the national median existing home price for all housing types was $208,500,$233,500, a 5.8%3.8% increase from December 2013.2015 (Source: National Association of Realtors®). On a national level, foreclosure filings during 20142016 decreased by 18%14% as compared to 2013. Foreclosure2015. However, foreclosure activity across the country decreased in 2014; however, it is expected to remain above historical average levels through 20152017 and beyond.

 

Changes in fixed-rate residential mortgage loan interest rates generally follow changes in long-term U.S. Treasury yields. Thirty-year fixedFollowing the U.S. presidential election, an increase in Treasury yields led to an increase in mortgage loan interest rates ranged fromrates. In addition, the Federal Open Market Committee (FOMC) of the Federal Reserve announced a low of 3.86% to a high of 4.43% during 2014 while during 2013, thirty-year25 basis point increase in the target range for the federal funds rate at the December 2016 meeting. Thirty-year fixed mortgage interest rates ranged from a low of 3.41% to a high of 4.49%4.32% during 2016, while during 2015 thirty-year fixed mortgage interest rates ranged from a low of 3.59% to a high of 4.09% (Source: the Federal Home Loan Mortgage Corporation’sFreddie Mac’s Weekly Primary Mortgage Market Survey).

 

Mortgage lenders originated an estimated $1.2$1.9 trillion of home loans during 2014, down 34%2016, up 12% from 2013. Mortgage2015. Total mortgage originations are forecast to remain relatively flat,be lower in 2017 versus 2016, with current industry estimates for 2015 totaling $1.22017 averaging $1.5 trillion (Source: Averageaverage of Fannie Mae, Freddie Mac and Mortgage Bankers Association forecasts). We expect efforts to expand GSE product offerings (including 97% loan-to-value loans) and a recent reduction in FHA mortgage insurance premiums to make mortgage credit more affordable.

In recent periods, we have seen increased competition from new and existing market participants in the correspondent production business, as well as reductions in the overall level of refinancing activity. We believe that this change in supply and demand within the marketplace has been driving lower production margins in recent periods, which is reflected in our results of operations in our net gains on mortgage loans held for sale.

 

We believe there is significant long-term market opportunity infor the production of non-Agency jumbo mortgage loans. However, most new jumbo mortgage loans howeverare either being originated or purchased by banks, and the current investor demand from institutional investors and large banksmarket for jumbo mortgage loan securitizations is limited, as evidenced by weak demand and inconsistent pricing for securitizations issuedobserved during 2014. The pace of prime2015 and 2016. Prime jumbo MBS issuances slowed during 2014, with securitizations totaling $8.3totaled $4 billion in UPB as compared with $12.9during 2016, a decrease from $11 billion in 2013.2015. During the year ended December 31, 2014,2016, we produced approximately $377.9$14 million in UPB of jumbo loans compared to $203.6$124 million in UPB of jumbo loans produced and $392 million in UPB of jumbo loans acquired, on a bulk basis, during the year ended December 31, 2013.2015.

 

In our capacity as an investment manager, we continue to see a robust market for distressed residential mortgage loans (sales of loan pools that consist of either non-performing loans, troubled but performing loans or a combination thereof) offered for sale. During 2014, the pool of sellers expanded to include programmatic sellers, such as HUD and Freddie Mac. During 2014, we reviewed 128 mortgage loan pools with UPB totaling approximately $34.7 billion. This compares to our review of 118 mortgage loan pools with UPB totaling approximately $35 billion during 2013. We acquired for PMT distressed loans with fair values totaling $560.5 million, $1.3 billion and $543 million during the years ended December 31, 2014, 2013 and 2012, respectively. While we expect to see a continued supply of distressed whole loans,loans; however, we believe the pricing for recent transactions has been less attractive for buyers. We remain patient and selective for PMT in making new investments inare transitioning PMT’s portfolio away from distressed whole loans to correspondent-related investments such as CRT and MSRs, and we continue to monitor the market to assess best executionoptimal resolution opportunities for distressed portfolio investments held by the Advised Entities.

 

Critical Accounting Policies

 

Preparation of financial statements in compliance with generally accepted accounting principles (“GAAP”)generally accepted in the United States (“GAAP”) requires us to make estimates and assumptions 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

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results, and they require us to make difficult, subjective or complex judgments. Our critical accounting policies primarily relate to our fair value estimates.

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Fair Value

 

We group financial statement itemsassets 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

December 31, 2016

 

 

Carrying value of

 

% of

 

 

 

 

 

Percentage of

 

Level/Description

 

assets measured (1)

 

total assets

 

Level/Description

 

Carrying value of
assets measured 

 

Total assets

 

Total stockholders' equity

 

   

(in thousands)

    

 

 

 

   

(in thousands)

    

 

 

 

 

Level 1: Prices determined using quoted prices in active markets for identical assets or liabilities.

 

$

26,324 

 

%

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. These may include quoted prices for similar assets or liabilities, interest rates, prepayment speeds, credit risk and others.

 

 

947,832 

 

38 

%

Level 3: Prices determined using significant unobservable inputs. In situations where observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used. Unobservable inputs reflect our assumptions about the factors that market participants use in pricing an asset or liability, and are based on the best information available in the circumstances.

 

 

974,089 

 

39 

%

Level 1:

Prices determined using quoted prices in active markets for identical assets or liabilities.

 

$

90,504

 

2%

 

6%

 

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. These may include quoted prices for similar assets or liabilities, interest rates, prepayment speeds, credit risk and others.

 

2,235,924

 

44%

 

160%

 

Level 3:

Prices determined using significant unobservable inputs. In situations where observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the year), unobservable inputs may be used. Unobservable inputs reflect our assumptions about the factors that market participants use in pricing an asset or liability, and are based on the best information available in the circumstances.

 

 

1,742,209

 

34%

 

125%

 

Total assets measured at or based on fair value(1)

 

$

1,948,245 

 

78 

%

 

$

4,068,637

 

79%

 

291%

 

Total assets

 

$

2,507,125 

 

 

 

Total assets

 

$

5,133,902

 

 

 

 

 

Total stockholders' equity

Total stockholders' equity

 

$

1,399,356

 

 

 

 

 


(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 item 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, 2014, $1.52016, $2.9 billion or 61%57% of our total assets were carried at fair value and $405.5 million$1.1 billion or 16%22% were carried based on their fair values (primarily(comprised of certain of our MSRs and real estate acquired in settlement of loans (“REO”) properties, which are carried at the lower of amortized cost or fair value). Of these assets carried at or based on fair value, $974.1 million$1.7 billion or 39% of total assets34% are measured using “Level 3” fair value inputs – significant inputs that are difficult to observe due to the illiquidity of the markets in which the assets are traded.traded and the difficulty in observing the inputs used by market participants in establishing fair value.  Changes in inputs to measurement of these financial statement itemsassets can have a significant effect on the amounts reported for these items including their reported balances and their effects on our results of operations.

 

As a result of the difficulty in observing certain significant valuation inputs affecting “Level 3” financial statement items,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 financial statement itemsassets and their fair values.liabilities. Likewise, due to the general illiquidity of some of these financial statement items,assets and liabilities, subsequent transactions may be at values significantly different from those reported.

 

Because the fair value of “Level 3” financial instruments isfair value assets and liabilities are difficult to estimate, our process includes performance of these items’ fair value estimation by a specialized staff and significant executivesenior management oversight. We have assigned the responsibility for estimating the fair values of non- interest rate lock commitment (“IRLC”) “Level 3” financial statement items

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fair value assets and liabilities to our Financial Analysis and Valuation group (the “FAV group”), which is responsible for valuing and monitoring our investment portfoliosthese items and maintenance of our valuation policies and procedures.procedures for non-IRLC assets and liabilities. The FAV group submits the results of its valuations to our senior management valuation committee, which oversees and approves the valuations before such valuations are included invaluations. During 2016, our periodic financial statements. Oursenior management valuation committee includesincluded our chief executive, financial, operating, credit,business development, risk and asset/liability management 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.

47


 

Table of Contents

Following is a discussion of our approach to measuring the balance sheet items that are most affected by “Level 3” fair value estimates.

 

Mortgage Loans

 

We carry mortgage loans at their fair values. We recognize changes in the fair value of mortgage loans in current period income as a component of Net gains on mortgage loans held for sale at fair value. We estimate the fair value of mortgage loans based on whether the mortgage loans are saleable into active markets with transparent pricing.observable fair value inputs.

·

We categorize mortgage loans that are saleable into active markets as “Level 2” fair value financial statement items. We estimateassets. At December 31, 2016, we held $2.1 billion of such loans’ fair values using inputs other than quoted prices within “Level 1” that are observable for the mortgage loans either directlyat fair value that we estimated using their quoted market price or indirectly.market price equivalent.

·

The CompanyWe categorize mortgage loans that are not saleable into active markets as “Level 3” fair value assets. “Level 3” fair value mortgage loans arise primarily from two sources:

-

We may purchase certain delinquent government guaranteed or insured mortgage loans from Ginnie Mae guaranteed pools in itsour mortgage loan servicing portfolio. The Company’sOur right to purchase such mortgage loans arises as the result of the borrower’s failure to make payments for three consecutive months preceding the month ofthat we repurchase by the Companymortgage loan and provides an alternative to the Company’sour obligation to continue advancing principal and interest at the coupon rate of the related Ginnie Mae security. To the extent such loans (“early buyout loans” or “EBO”) have not become saleable into another Ginnie Mae guaranteed security by becoming current either through the borrower’s reperformance or through completion of a modification of the mortgage loan’s terms, the Company measureswe measure such mortgage loans using “Level 3” fair value inputs.

-

Certain of the Company’sour mortgage loans may become non-saleable into active markets due to our identification of one or more identified defects. Because such mortgage loans are generally not saleable into active mortgage markets, they are classifiedwe classify them as “Level 3” financial statement items.

·

The significant unobservable inputs used in the fair value measurement of the Company’s “Level 3” mortgage loans held for sale at fair value are discount rates, home price projections, voluntary prepayment speeds and default 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.assets.

 

At December 31, 2016, we held $47.3 million of “Level 3” fair value mortgage loans.

The significant unobservable inputs used in the fair value measurement of our “Level 3” fair value mortgage loans held for sale are discount rates, home price projections, voluntary prepayment speeds and default speeds. Significant changes in any of those inputs in isolation could result in a significant change to the mortgage loans’ fair value measurement.

Interest Rate Lock Commitments

 

Our net gains on mortgage loans held for sale includes our estimates of the gains or losses we expect to realize upon the sale of mortgage loans we have contractually committed to fund or purchase but have not yet funded, purchased or sold. We recognize a substantial portion of our net gains on mortgage loans held for sale at fair value before we fund or purchase the loan. Inmortgage loan as the courseresult of our consumer direct and correspondent production activities, we make contractual commitments to prospective borrowers and correspondent lenders to purchase loans at specified terms.these commitments. We call these commitments interest rate lock commitments, or IRLCs. We recognize the fair value of IRLCs at the time we make the commitment to the correspondent lenderseller or mortgage loan

48


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applicant and adjust the fair value of such IRLCs as the mortgage loan approaches the point of funding or purchase or the prospective transaction is canceled.

 

We carry IRLCs as either derivative assets or derivative liabilities on our consolidated balance sheet. The fair value of IRLCsan IRLC is transferred to the fair value of mortgage loans held for sale at fair value when the mortgage loan is funded.funded or purchased. At December 31, 2016, we held $65.8 million of IRLC assets at fair value.

 

An active, observable market for IRLCs does not exist. Therefore, we measure the fair value of IRLCs using methods and assumptions we believe that market participants use in pricing IRLCs. We estimate the fair value of an IRLC based on observable Agency MBS prices, our estimates of the fair value of the MSRs we expect to receive in the sale of the mortgage loans and the probability that we will fund or purchase the mortgage loan will be purchased or funded as a percentage of the commitment we have made (the “pull-through rate”).

 

Pull-through rates and MSR fair values are based on our estimates as these inputs are difficult to observe in the mortgage marketplace. Changes in ourOur estimate of the probability that a mortgage loan will be funded and changes inmarket interest rates are updated as the mortgage loans move through the funding process and as mortgage market interest rates change and may result in significant changes in the estimates of the fair value of the IRLCs. Such changes are reflected in the change in fair value of IRLCs which is a

48


Table of Contents

component of our netNet gains on mortgage loans held for sale at fair value in the period of the change. The financial effects of changes in these assumptionsinputs are generally inversely correlated. Increasing mortgage interest rates have a positive effect on the fair value of the MSR component of IRLC fair value but increase the pull-through rate for loans that decreasethe mortgage loan principal and interest payment cash flow component, which has decreased in fair value.

 

A shift in our assessment of an input to the valuation of interest rate lock commitmentsIRLCs can have a significant effect on the amount of net Net gains on sale of mortgage loans held for sale for the period. We believe that the most significant “Level 3” fair value input to the valuationmeasurement of IRLCs is the pull-through rate.

Following is a quantitative summary of the effect of changes in the pull-through inputsrate input on the fair value of IRLCs:

 

 

 

 

 

Shift in input

 

Effect on fair value of IRLC of a change in pull-through rate

 

 

 

(in thousands)

5

 

$

3,183
10

 

$

6,073
20

 

$

11,218
(5)

 

$

(3,864)
(10)

 

$

(7,728)
(20)

 

$

(15,456)

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.

 

 

 

 

 

 

 

Shift in input

   

Pull-through rate
sensitivity

 

 

 

 

(in thousands)

 

%

 

$

1,895 

 

10 

%

 

$

3,789 

 

20 

%

 

$

5,490 

 

(5)

%

 

$

(1,895)

 

(10)

%

 

$

(3,789)

 

(20)

%

 

$

(7,578)

 

Amortization, Impairment and Change in Fair Value of Mortgage Servicing Rights and Mortgage Servicing Liabilities (“MSLs”)

 

MSRs and MSLs represent the value ofassigned to a contract that obligates us to service the mortgage loans on behalf of the owner of the mortgage loan in exchange for servicing fees and the right to collect certain ancillary income from the borrower. We initially recognize MSRs at our estimate of the fair value of the contract to service the loans. At December 31, 2016, we held $1.6 billion of carrying value of MSRs net of MSLs.

 

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As economic fundamentals influencing the underlying mortgage loans change, our estimate of the fair value of the related MSR or MSL we retainhold will also change. As a result, we will record changes in fair value as a component of net servicing fees for the MSRs and MSLs we carry at fair value, and we may recognize changes in fair value relating to our MSRs carried at the lower of amortized cost or fair value depending on the relationship of the MSR’s fair value to its carrying value at the measurement date.  See “Note 8—Fair Value”These fair value changes will be recognized as a component of Amortization, impairment and change in the Notes to Consolidated Financial Statements for key assumptions used in determining the fair value of MSRs at the time of the initial recognitionmortgage servicing rights and at the period end for the periods covered by our financial statements.mortgage servicing liabilities. 

 

After the initial recognition of MSRs and MSLs, we account for such assets based on the class of MSRs: originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5%; and originated MSRs backed by mortgage loans with initial interest rates of more than 4.5%. Originated; and purchased MSRs. We account for originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5% are accounted for using the amortization method. Originated MSRs backed by loans with initial interest rates of more than 4.5% and purchased MSRs are accounted for at fair value with changes in fair value recorded in current period income. MSLs are accounted for at fair value with changes in fair value recorded in current period income.

 

We also evaluate MSRs accounted for using the amortization method for impairment with reference to the MSR’s fair value at the measurement date. Impairment occurs when the current fair value of the MSR falls below the its carrying value (carrying value is the amortized cost reduced by any related valuation allowance). If MSRs are impaired, the impairment is recognized in current period income and the carrying value of the MSRs is adjusted through a valuation allowance. If the value of impaired MSRs subsequently increases, we recognize the increase in value in current period income and, through a reduction in the valuation allowance, adjust the carrying value of the MSRs to a level not in excess of amortized cost.

When evaluating MSRs for impairment, we stratify the assets by predominant risk characteristic including loan type (fixed‑rate or adjustable‑rate) and note interest rate. We stratify fixed‑rate loans into note interest rate pools of 50 basis points for note interest rates between 3.0% and 4.5% and a single pool for note interest rates below 3%. We evaluate adjustable‑rate mortgage loans with initial interest rates of 4.5% or less in a single pool.

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We periodically review the various impairment strata to determine whether the value of the impaired MSRs in a given stratum is likely to recover. When we conclude that recovery of the value is unlikely in the foreseeable future, a write‑down of the cost of the MSRs for that stratum to its estimated recoverable value is charged to the valuation allowance.

Amortization and impairment of MSRs accounted for using the amortization method are included in current period income as a component of net servicing fees.

MSRs Accounted for Using the Amortization Method

 

We amortize MSRs accounted for using the amortization method. MSR amortization is determined by applying the ratio of the net MSR cash flows projected for the current period to the estimated total remaining net MSR cash flows. The estimated total net MSR cash flows are determined at the beginning of each month using prepayment assumptionsinputs applicable at that time.

 

We also evaluate MSRs accounted for using the amortization method for impairment with reference to the assets’ fair value at the measurement date. Impairment occurs when the current fair value of the MSR falls below the asset’s amortized cost. If MSRs are impaired, the impairment is recognized in current period income and the carrying value of the MSRs is adjusted through a valuation allowance. If the fair value of impaired MSRs subsequently increases, we recognize the increase in fair value in current period income and, through a reduction in the valuation allowance, adjust the carrying value of the MSRs to a level not in excess of amortized cost.

When evaluating MSRs for impairment, we stratify the assets by predominant fair value risk characteristic including loan type (fixed-rate or adjustable-rate) and note interest rate. We stratify fixed-rate mortgage loans into note interest rate pools of 50 basis points for note interest rates between 3.0% and 4.5% and a single pool for note interest rates of less than or equal to 3.0%. We evaluate adjustable-rate mortgage loans with initial interest rates of 4.5% or less in a single pool. Amortization and impairment of MSRs accounted for using the amortization method are included in current period income as a component of Net mortgage loan servicing fees. During the year ended December 31, 2016, we recognized $60.5 million in impairment of MSRs accounted for using the amortization method.

We periodically review the various impairment strata to determine whether the fair value of the impaired MSRs in a given stratum is likely to recover. When we conclude that recovery of the value is unlikely in the foreseeable future, a write-down of the cost of the MSRs for that stratum to its estimated recoverable value is charged to the valuation allowance. During the year ended December 31, 2016, we recognized $12.8 million in write-downs of MSRs.

MSRs and MSLs Accounted for at Fair Value

 

We include changes in fair value of MSRs and MSLs accounted for at fair value in current period income as a component of NetAmortization, impairment and change in fair value of mortgage servicing feesrights and mortgage servicing liabilities. .  During the year ended December 31, 2016, we recognized a $146.0 million net reduction in fair value of MSRs and MSLs accounted for at fair value.

 

A shift in the market for MSRs and MSLs or a change in our assessment of an input to the valuation of MSRs and MSLs can have a significant effect on thetheir fair value of MSRs and in our income for the period. We believe the most significant “Level 3” fair value inputs to the valuation of MSRs and MSLs are the pricing spread (discount rate), prepayment speed and annual per-loan cost of servicing.

 

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Following is a summary of the effect on fair value of MSRs  (which totaled $742.1 million$1.6 billion at December 31, 2014)2016) of various changes to these key inputs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect on fair value of MSRs of a change in input value

 

 

 

Effect on fair value of MSRs of a change in input value

 

Shift in input

Shift in input

   

Pricing spread

   

Prepayment speed

   

Servicing cost

 

Shift in input

   

Pricing spread

   

Prepayment speed

   

Servicing cost

 

 

 

(in thousands)

 

 

 

(in thousands)

 

5

%

 

$

(14,260)

 

$

(14,411)

 

$

(5,902)

 

 

$

(31,479)

 

$

(25,454)

 

$

(14,502)

 

10

%

 

$

(27,991)

 

$

(28,329)

 

$

(11,802)

 

 

$

(61,761)

 

$

(50,086)

 

$

(29,006)

 

20

%

 

$

(53,974)

 

$

(54,786)

 

$

(23,605)

 

 

$

(118,980)

 

$

(97,046)

 

$

(58,012)

 

(5)

%

 

$

14,819 

 

$

14,930 

 

$

5,902 

 

 

$

32,744

 

$

26,318

 

$

14,502

 

(10)

%

 

$

30,228 

 

$

30,408 

 

$

11,802 

 

 

$

66,826

 

$

53,545

 

$

29,006

 

(20)

%

 

$

62,962 

 

$

63,136 

 

$

23,605 

 

 

$

139,320

 

$

110,928

 

$

58,012

 

 

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. Furthermore, certain of our MSRs are accounted for using the amortization method and are carried at the lower of amortized cost or fair value. Such assets’ carrying value may not be immediately affected as a result of a change in input values depending on the carrying value of the MSR asset before the change in input occurs and whether the input change causes our estimate of fair value to decreasechange to a level below the carrying valueamortized cost of those MSRs. Therefore the preceding analyses are not projections of the effects of a shock event or a change in management’sour estimate of an input and should not be relied upon as earnings projections.

 

Excess Servicing Spread

 

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 the level specified in the acquisitionsale agreement. We carry our excess servicing

50


Table of Contents

spread financing (“ESS”) at fair value. We record changes in theAt December 31, 2016, we carried $288.7 million of fair value of excess servicing spread in Amortization, Impairment and Change in Fair Value of Mortgage Servicing Rights.ESS.

 

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 ESS 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 excess servicing spread in Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities. During the year ended December 31, 2016, we recorded $23.9 million of net reduction in fair value of ESS.

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Table of Contents

We believe that the most significant “Level 3” fair value inputs to the valuation of ESS are the pricing spread (discount rate) and prepayment speed.

Following is a summary of the effect on fair value (which totaled $191.2 million at December 31, 2014) of various changes to these inputs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect on excess servicing spread of a change in input value

 

 

Effect on excess servicing spread of a change in input value

Shift in input

Shift in input

 

Pricing spread

 

Prepayment speed

Shift in input

 

Pricing spread

 

Prepayment speed

 

 

(in thousands)

 

 

(in thousands)

5

%

 

$

(2,189)

 

$

(4,385)

 

$

(2,748)

 

$

(6,386)
10

%

 

$

(4,329)

 

$

(8,597)

 

$

(5,445)

 

$

(12,516)
20

%

 

$

(8,464)

 

$

(16,535)

 

$

(10,691)

 

$

(24,067)
(5)

%

 

$

2,241 

 

$

4,570 

 

$

2,800

 

$

6,657
(10)

%

 

$

4,536 

 

$

9,337 

 

$

5,654

 

$

13,602
(20)

%

 

$

9,295 

 

$

19,509 

 

$

11,529

 

$

28,430

 

The preceding analyses hold constant all of the inputs other than the input that is being changed to show an estimate of the effect on fair value of a change in that specific input. We expect that in a market shock event, multiple inputs would be affected and the effects of these changes may compound or counteract each other. Therefore the preceding analyses are not projections of the effects of a shock event or a change in our estimate of an input and should not be relied upon as earnings projections.

Critical Accounting Policy Not Based on Fair Value-Liability for Losses Under Representations and Warranties

 

We record a provision for losses relating to our representations and warranties as part of our mortgage loan sale transactions. The method we use to estimate the liability for representations and warranties is a function of the representations and warranties given and considers a combination of factors, including, but not limited to, estimated future default and mortgage loan repurchase rates, and the potential severity of loss in the event of default and, if applicable, the probability of reimbursement by the correspondent mortgage loan seller. We establish a liability at the time loans are sold and periodically update our liability estimate.  At December 31, 2016, the balance of our liability for losses under representations and warranties totaled $19.1 million.

 

The level of the liability for losses under representations and warranties is difficult to estimate and requires considerable management judgment. The level of mortgage loan repurchase losses is dependent on economic factors, investorpurchaser or insurer loss mitigation strategies, and other external conditions that may change over the lives of the underlying mortgage loans.  Our estimate of the liability for representations and warranties is developed by our credit administration staff. The liability estimate is reviewed and approved by our senior management credit committee which includes PFSI’s chief executive, operating,the senior executives of the Company and of the loan production, loan servicing and credit and enterprise risk mortgage fulfillment, institutional mortgage banking and shared services officers.management areas.

 

As economic fundamentals change, as investorpurchaser and Agency evaluationinsurer 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 lenders,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 results of operations. During the year ended December 31, 2016, we recorded reductions to our previously recorded representations and warranties liability amounts totaling $7.7 million.

 

Accounting Developments

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2014-09, Revenue from Contracts with Customers (Subtopic 606)(“ASU 2014-09”), which supersedes the guidance in the revenue recognitiontopic of its Accounting Standards Codification (the “ASC”). ASU 2014-09 clarifies the principles for recognizing revenue in order to improve comparability of revenue recognition practices across entities

5152


 

Table of Contents

and industries with certain scope exceptions including financial instruments, leases, and guarantees. ASU 2014-09 provides guidance intended to assist in the identification of contracts with customers and separate performance obligations within those contracts, the determination and allocation of the transaction price to those identified performance obligations and the recognition of revenue when a performance obligation has been satisfied. ASU 2014-09 also requires disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers.

Upon adoption, ASU 2014-09 provides for transition through either a full retrospective approach requiring the restatement of all presented prior periods or a modified retrospective approach, which allows the new recognition standard to be applied to only those contracts that are not completed at the date of transition. If the modified retrospective approach is adopted, a cumulative-effect adjustment to retained earnings is performed with additional disclosures required including the amount by which each line item is affected by the transition as compared to the guidance in effect before adoption and an explanation of the reasons for significant changes in these amounts.

The FASB has issued several amendments to ASU 2014-09, including:

·

In May 2014, ASU 2015-14, Revenue From Contracts with Customers (“ASU 2015-14”). This update deferred the initial effective date of ASU 2014-09. As a result of the issuance of ASU 2015-14, ASU 2014-09 is effective for annual reporting periods beginning on or after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

·

In March 2015, ASU 2016-08, Principal Versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments to this update are intended to improve the implementation guidance on principal versus agent considerations in ASU 2014-09 by clarifying how an entity should identify the unit of account (i.e. the specified good or service) and how an entity should apply the control principle to certain types of arrangements.

·

In May 2016, ASU 2016-12, Narrow-Scope Improvements and Practical Expedients. The amendments to this update clarify certain core recognition principles and provide practical expedients available at transition. The improvements address collectability, sales tax presentation, noncash consideration, contract modifications and completed contracts at transition.

·

In December 2016, ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue From Contracts with Customers. The amendments to this update affect narrow aspects of the guidance issued in ASU 2014-09. The amendments remove certain items under its scope and clarify application of certain principles. The amendments address loan guarantee fees, contracts costs impairment testing, provisions for losses on construction, insurance contracts, disclosure of remaining performance obligations, contract modifications, contract asset versus receivable, refund liability, advertising cost, fixed-odds wagering contracts in the casino industry and cost capitalization for advisor to private funds and public funds.

The Company expects that upon adoption, the guidance currently applied by the Company to its Carried Interest may be affected. The Company’s Carried Interest arrangements with the Investment Funds represent capital allocations to PFSI. The Company is currently evaluating whether the nature and substance of its Carried Interest arrangements are within the scope of ASU 2014-09, or whether such Carried Interest should be accounted for under the equity method of accounting under the Investments Equity Method and Joint Ventures topic of the ASC.

If the Company concludes the Carried Interest should be accounted for under the equity method of accounting, Carried Interest would be accounted for as a financial instrument and the amount recognized by the Company would not change significantly.  The Company is still determining the potential additional effects of ASU 2014-09 on its financial

53


Table of Contents

statements for other arrangements that may be within the scope of ASU 2014-09.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related note disclosures.

Under GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. Financial reporting under this presumption is commonly referred to as the going concern basis of accounting. The going concern basis of accounting establishes the fundamental basis for measuring and classifying assets and liabilities.

Under ASU 2014-15, an entity would be required to evaluate its status as a going concern as part of its periodic financial statement preparation process and would be required to disclose information about its potential inability to continue as a going concern when “substantial doubt” about its ability to continue as a going concern for the period of one year from the earlier of the date its financial statements are issued or are ready to be issued.

If management concludes that there is “substantial doubt” about the entity’s ability to continue as a going concern, it must disclose the principal conditions or events causing substantial doubt to be raised, management’s evaluation of the conditions and management’s plans. If substantial doubt is not alleviated as a result of management’s plans, the company is required to include a statement that there is “substantial doubt about the entity’s ability to continue as a going concern.” ASU 2014-15 also requires an entity to disclose how the substantial doubt was resolved in the period that substantial doubt no longer exists.

ASU 2014-15 is effective for the annual period ending December 31, 2016. The adoption of ASU 2014-15 did not have an effect on the financial statements of the Company.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are Variable Interest Entities (“VIEs”) or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company adopted ASU 2015-02 effective January 1, 2016. The adoption of ASU 2015-02 had no effect on the Company’s consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 affects the accounting for equity investments, financial liabilities under the fair value option, the presentation and disclosure requirements for financial instruments, and the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities.

ASU 2016-01 requires that:

·

All equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) with readily determinable fair values will generally be measured at fair value through earnings.

·

When the fair value option has been elected for financial liabilities, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. The accumulated gains and losses due to these changes will be reclassified from accumulated other comprehensive income to earnings if the financial liability is settled before maturity.

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Table of Contents

·

For financial instruments measured at amortized cost, public business entities will be required to use the exit price when measuring the fair value of financial instruments for disclosure purposes.

·

Financial assets and financial liabilities shall be presented separately in the notes to the financial statements, grouped by measurement category (e.g., fair value, amortized cost, lower of cost or fair value) and form of financial asset (e.g., loans, securities).

·

Public business entities will no longer be required to disclose the methods and significant assumptions used to estimate the fair value of financial instruments carried at amortized cost.

·

Entities will have to assess the realizability of a deferred tax asset related to a debt security classified as available for sale in combination with the entity’s other deferred tax assets.

The classification and measurement guidance will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption of the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income is permitted and can be elected for all financial statements of fiscal years and interim periods that have not yet been issued or that have not yet been made available for issuance. The Company does not expect the adoption of ASU 2016-01to have a significant effect on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”).  ASU 2016-02 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors) and supersedes previous leasing standards. ASU 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether the lease is effectively a financed purchase of the leased asset by the lessee. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. 

ASU 2016-02 is effective for the Company for reporting periods beginning after December 15, 2018, with early adoption permitted. As shown in Note 24 - Commitments and Contingencies, the Company had approximately $100.8 million in future minimum lease payment commitments as of December 31, 2016. Were the Company to adopt ASU 2016-02 as of December 31, 2016, it would be required to recognize a right-of-use asset and a corresponding liability based on the present value of such obligation as of December 31, 2016. The Company does not expect to recognize a significant cumulative effect adjustment to its stockholders’ equity as a result of adopting ASU 2016-02.

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation(Topic 718):  Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment award transactions, including:

·

Modifies the accounting for income taxes relating to share-based payments. All excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) will be recognized as income tax expense or benefit in the consolidated income statement. The tax effects of exercised or vested awards will be treated as discrete items in the reporting period in which they occur. An entity will recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Under current GAAP, excess tax benefits are recognized in additional paid-in capital; tax deficiencies are recognized either as an offset to accumulated excess tax benefits, if any, or in the consolidated income statement in the period they reduce income taxes payable.

·

Changes the classification of excess tax benefits on the consolidated statement of cash flows. In the consolidated statement of cash flows, excess tax benefits will be classified along with other income tax cash flows as an operating activity. Under current GAAP, excess tax benefits are separated from other income tax cash flows and classified as a financing activity.

·

Changes the requirement to estimate the number of awards that are expected to vest. Under ASU 2016-09, an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest as presently required or account for forfeitures when they occur.

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Table of Contents

Under current GAAP, accruals of compensation cost are based on the number of awards that are expected to vest.

·

Changes the tax withholding requirements for share-based payment awards to qualify for equity accounting. The threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions. Under current GAAP, for an award to qualify for equity classification is that an entity cannot partially settle the award in cash in excess of the employer’s minimum statutory withholding requirements.

·

Establishes GAAP for the classification of employee taxes paid when an employer withholds shares for tax withholding purposes. Cash paid by an employer when directly withholding shares for tax- withholding purposes should be classified as a financing activity. This guidance establishes GAAP related to the classification of withholding taxes in the statement of cash flows as there is no such guidance under current GAAP.

ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any organization in any interim or annual period. The Company does not expect the adoption of ASU 2016-09 to have a significant effect on its stock-based compensation expense or on previously recognized paid-in capital relating to such expense.

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Table of Contents

Results of OperationsManagement fees and Carried Interest

 

Our results of operations are summarized below:

 

23,726

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

    

2014

    

2013

    

2012

 

 

 

(in thousands)

 

Revenues

 

 

 

 

 

 

 

 

 

 

Net gains on mortgage loans held for sale at fair value

 

$

167,024 

 

$

138,013 

 

$

118,170 

 

Loan origination fees

 

 

41,576 

 

 

23,575 

 

 

9,634 

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

48,719 

 

 

79,712 

 

 

62,906 

 

Net loan servicing fees

 

 

216,919 

 

 

90,010 

 

 

40,105 

 

Management fees

 

 

42,508 

 

 

40,330 

 

 

21,799 

 

Carried Interest from Investment Funds

 

 

6,156 

 

 

13,419 

 

 

10,473 

 

Net interest expense

 

 

(9,486)

��

 

(1,041)

 

 

(1,525)

 

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

 

 

(6)

 

 

41 

 

 

817 

 

Other

 

 

4,867 

 

 

2,500 

 

 

2,707 

 

Total net revenue

 

 

518,277 

 

 

386,559 

 

 

265,086 

 

Total expenses

 

 

295,244 

 

 

204,433 

 

 

146,763 

 

Provision for income taxes

 

 

26,722 

 

 

9,961 

 

 

 —

 

Net income

 

$

196,311 

 

$

172,165 

 

$

118,323 

 

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes by segment:

 

 

 

 

 

 

 

 

 

 

Mortgage banking:

 

 

 

 

 

 

 

 

 

 

Production

 

$

135,619 

 

$

126,020 

 

 

 

 

Servicing

 

 

65,925 

 

 

20,048 

 

 

 

 

Total mortgage banking

 

 

201,544 

 

 

146,068 

 

$

93,178 

 

Investment management

 

 

20,111 

 

 

36,058 

 

 

25,145 

 

Non-segment activities (1)

 

 

1,378 

 

 

 

 

 

 

 

 

 

$

223,033 

 

$

182,126 

 

$

118,323 

 

During the year:

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments issued, net of cancellations

 

$

19,589,704 

 

$

15,805,416 

 

$

10,116,188 

 

Fair value of mortgage loans purchased and originated for sale:

 

 

 

 

 

 

 

 

 

 

Government-insured or guaranteed loans acquired from PennyMac Mortgage Investment Trust

 

$

16,431,338 

 

$

16,113,806 

 

$

8,864,264 

 

Consumer direct

 

 

1,952,505 

 

 

1,104,051 

 

 

539,160 

 

 

 

$

18,383,843 

 

$

17,217,857 

 

$

9,403,424 

 

Unpaid principal balance of mortgage loans fulfilled for PennyMac Mortgage Investment Trust

 

$

11,476,448 

 

$

15,225,153 

 

$

13,028,375 

 

At year end:

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance of mortgage loan servicing portfolio:

 

 

 

 

 

 

 

 

 

 

Owned

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

$

64,690,613 

 

$

45,938,820 

 

$

11,254,705 

 

Mortgage servicing liabilities

 

 

478,581 

 

 

 —

 

 

 —

 

Mortgage loans held for sale

 

 

1,100,910 

 

 

506,540 

 

 

417,742 

 

 

 

 

66,270,104 

 

 

46,445,360 

 

 

11,672,447 

 

Subserviced

 

 

39,709,945 

 

 

31,722,079 

 

 

16,480,102 

 

 

 

$

105,980,049 

 

$

78,167,439 

 

$

28,152,549 

 

Net assets of Advised Entities:

 

 

 

 

 

 

 

 

 

 

PennyMac Mortgage Investment Trust

 

$

1,578,172 

 

$

1,467,114 

 

$

1,201,336 

 

Investment Funds

 

 

424,182 

 

 

557,956 

 

 

591,154 

 

 

 

$

2,002,354 

 

$

2,025,070 

 

$

1,792,490 

 


30,865

(1)

Represents repricing of Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement.48,664

53,749

32,272

Net interest expense

 

Comparison of the years ended December 31, 2014, 2013 and 2012

 

(25,079)

During the year ended December 31, 2014, we recorded

(19,382)

(9,486)

(1,041)

(1,525)

Other

3,995

1,242

4,861

2,541

3,524

Total net income of $196.3 million. Our net income in 2014 reflects net loan servicing fees of $216.9 million, an increase of $126.9 million, or 141%, from 2013 resulting from the growth in our mortgage servicing operations. As of December 31, 2014, our loan servicing portfolio stood at $106.0 billion in UPB, an increase of approximately $27.8 billion, or 36%, from December 31, 2013. This growth wasrevenue

52


 

931,887

Table of Contents

713,110

supplemented by increased net gains on mortgage

518,277

386,559

265,086

Expenses

Compensation

342,153

274,262

190,707

148,576

124,014

Servicing

85,857

68,085

48,430

7,028

3,642

Other

120,794

91,570

56,107

48,829

19,107

Total expenses

548,804

433,917

295,244

204,433

146,763

Income before provision for income taxes

383,083

279,193

223,033

182,126

118,323

Provision for income taxes

46,103

31,635

26,722

9,961

 —

Net income

336,980

247,558

196,311

172,165

$

118,323

Less: Net income attributable to noncontrolling interest

270,901

200,330

159,469

157,765

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

$

66,079

$

47,228

$

36,842

$

14,400

Condensed Consolidated Balance Sheets:

Assets

Mortgage loans held for sale at fair value and loan origination fees resulting from the growth in volume of mortgage loans we purchased and originated and subsequently sold during the year. These revenue increases were partially offset by a decrease in management fees and

$

2,172,815

$

1,101,204

$

1,147,884

$

531,004

$

448,384

Mortgage servicing rights

1,627,672

1,411,935

730,828

483,664

108,975

Carried Interest of $5.1 milliondue from Investment Funds

70,906

69,926

67,298

61,142

47,723

Servicing advances

348,306

299,354

228,630

154,328

93,152

Other

914,203

622,875

332,046

354,337

133,929

Total assets

$

5,133,902

$

3,505,294

$

2,506,686

$

1,584,475

$

832,163

Liabilities and to increased expenses incurred to accommodate the growth of our mortgage banking segments.stockholders' equity

 

During the year ended December 31, 2013, we recorded net income of $172.2 million. Our net income in 2013 reflects net

Assets sold under agreements to repurchase

$

1,735,114

$

1,166,731

$

822,252

$

471,592

$

393,534

Mortgage loan participation and sale agreements

671,426

234,872

143,568

 —

 —

Notes payable

150,942

61,136

146,855

52,154

53,013

Excess servicing fees of $90.0 million and net gains on mortgage loans held for salespread financing at fair value payable to PennyMac Mortgage Investment Trust

288,669

412,425

191,166

138,723

 —

Other

888,395

567,780

395,579

292,802

123,866

Total liabilities

3,734,546

2,442,944

1,699,420

955,271

570,413

Stockholders' equity

1,399,356

1,062,350

807,266

629,204

261,750

Total liabilities and stockholders' equity

$

5,133,902

$

3,505,294

$

2,506,686

$

1,584,475

$

832,163

Earnings Per Share of $138.0 million, increases of $49.9 million and $19.8 million, respectively, from 2012 resulting from the growth inCommon Stock (1):

Basic

$

2.98

$

2.17

$

1.73

$

0.83

Diluted

$

2.94

$

2.17

$

1.73

$

0.82

Year end Share:

Book value per share

$

15.49

$

12.32

$

9.92

$

8.04

Share price

$

16.65

$

15.36

$

17.30

$

17.55

45


Table of Contents


(1)

After we completed our mortgage servicing and consumer direct lending operations. As of December 31,IPO on May 14, 2013, the UPBearnings per share of our loan servicing portfolio was $78.2 billion, an increase of approximately $50.0common stock calculation became applicable.

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Observations on Current Market Conditions

Our business is affected by macroeconomic conditions in the United States, including economic growth, unemployment rates, the residential housing market and interest rate levels and expectations. The U.S. economy continues to grow, albeit at a modest pace, as reflected in recent economic data. During 2016, U.S. real gross domestic product expanded at an annual rate of 1.9% compared to 0.9% for 2015. The national seasonally adjusted unemployment rate was 4.7% at December 31, 2016, 5.0% at December 31, 2015 and 5.6% at December 31, 2014. Delinquency rates on residential real estate loans remain somewhat elevated compared to historical rates, but have been steadily declining. As reported by the Federal Reserve Bank, during the third quarter of 2016, the delinquency rate on residential real estate loans held by commercial banks was 4.3%, a reduction from 5.2% during the fourth quarter of 2015.

Residential real estate activity remains strong. The seasonally adjusted annual rate of existing home sales for December 2016 was 1.5% higher than for December 2015, and the national median existing home price for all housing types was $233,500, a 3.8% increase from December 2015 (Source: National Association of Realtors®). On a national level, foreclosure filings during 2016 decreased by 14% as compared to 2015. However, foreclosure activity is expected to remain above historical average levels through 2017 and beyond.

Changes in fixed-rate residential mortgage loan interest rates generally follow changes in long-term U.S. Treasury yields. Following the U.S. presidential election, an increase in Treasury yields led to an increase in mortgage loan interest rates. In addition, the Federal Open Market Committee (FOMC) of the Federal Reserve announced a 25 basis point increase in the target range for the federal funds rate at the December 2016 meeting. Thirty-year fixed mortgage interest rates ranged from a low of 3.41% to a high of 4.32% during 2016, while during 2015 thirty-year fixed mortgage interest rates ranged from a low of 3.59% to a high of 4.09% (Source: Freddie Mac’s Weekly Primary Mortgage Market Survey).

Mortgage lenders originated an estimated $1.9 trillion of home loans during 2016, up 12% from 2015. Total mortgage originations are forecast to be lower in 2017 versus 2016, with current industry estimates for 2017 averaging $1.5 trillion (Source: average of Fannie Mae, Freddie Mac and Mortgage Bankers Association forecasts).

We believe there is long-term market opportunity for the production of non-Agency jumbo mortgage loans. However, most new jumbo mortgage loans are either being originated or purchased by banks, and the current market for jumbo mortgage loan securitizations is limited, as evidenced by weak demand and inconsistent pricing observed during 2015 and 2016. Prime jumbo MBS securitizations totaled $4 billion in UPB during 2016, a decrease from $11 billion in 2015. During the year ended December 31, 2016, we produced approximately $14 million in UPB of jumbo loans compared to $124 million in UPB of jumbo loans produced during the year ended December 31, 2015.

In our capacity as an investment manager, we expect to see a continued supply of distressed whole loans; however, we believe the pricing for recent transactions has been less attractive for buyers. We are transitioning PMT’s portfolio away from distressed whole loans to correspondent-related investments such as CRT and MSRs, and we continue to monitor the market to assess optimal resolution opportunities for distressed portfolio investments held by the Advised Entities.

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.

46


Table of Contents

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

Percentage of

 

Level/Description

 

Carrying value of
assets measured 

 

Total assets

 

Total stockholders' equity

 

 

 

   

(in thousands)

    

 

 

 

 

Level 1:

Prices determined using quoted prices in active markets for identical assets or liabilities.

 

$

90,504

 

2%

 

6%

 

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. These may include quoted prices for similar assets or liabilities, interest rates, prepayment speeds, credit risk and others.

 

 

2,235,924

 

44%

 

160%

 

Level 3:

Prices determined using significant unobservable inputs. In situations where observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the year), unobservable inputs may be used. Unobservable inputs reflect our assumptions about the factors that market participants use in pricing an asset or liability, and are based on the best information available in the circumstances.

 

 

1,742,209

 

34%

 

125%

 

Total assets measured at or based on fair value (1)

 

$

4,068,637

 

79%

 

291%

 

Total assets

 

$

5,133,902

 

 

 

 

 

Total stockholders' equity

 

$

1,399,356

 

 

 

 

 


(1)

Includes assets measured on both a recurring and nonrecurring basis based on the accounting principles applicable to the specific asset or 178%, from December 31, 2012. Our mortgage loan production volume increased $7.8 billion in 2013 comparedliability and whether we have elected to 2012. This growth was supplemented by increased management fees and Carried Interest resulting from incentive fee income in our investment management activities. These revenue increases were partially offset by increases in expenses incurred to accommodate our growth.

Duringcarry the year ended December 31, 2012, we recorded net income of $118.3 million. Our net income in 2012 reflects net loan servicing fees of $40.0 million, an increase of $11.4 million, or 40%, from 2011 resulting from the growth in our mortgage servicing operations. As of December 31, 2012, our loan servicing portfolio grew to $28.2 billion, an increase of approximately $20.4 billion, or 264%, from December 31, 2011. This growth was supplemented by increased netitem 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, 2016, $2.9 billion or 57% of our total assets were carried at fair value and $1.1 billion or 22% were carried based on their fair values (comprised of certain of our MSRs and real estate acquired in settlement of loans (“REO”) properties, which are carried at the lower of amortized cost or fair value). Of these assets carried at or based on fair value, $1.7 billion or 34% are measured using “Level 3” fair value inputs – significant inputs that are difficult to observe due to the illiquidity of the markets in which the assets are traded and the 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 results of operations.

As a result of the difficulty in observing certain significant valuation inputs affecting “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. Likewise, due to the general illiquidity of some of these assets and liabilities, 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 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”

47


Table of Contents

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 and approves the valuations. During 2016, our senior management valuation committee included our chief executive, financial, operating, business development, risk and asset/liability management officers.

The fair value of our IRLCs is developed by our Capital Markets Risk Management staff and is reviewed by our Capital Markets Operations group.

Following is a discussion of our approach to measuring the balance sheet items that are most affected by “Level 3” fair value estimates.

Mortgage Loans

We carry mortgage loans at their fair values. We recognize changes in the fair value of mortgage loans in current period income as a component of Net gains on mortgage loans held for sale at fair value. We estimate the fair value of mortgage loans based on whether the mortgage loans are saleable into active markets with observable fair value inputs.

·

We categorize mortgage loans that are saleable into active markets as “Level 2” fair value assets. At December 31, 2016, we held $2.1 billion of such mortgage loans at fair value resulting from growth in our loan production. Mortgage loan purchases and originations increased $8.7 billion during 2012 compared to 2011. These revenue increases were partially offset by increases in expenses incurred to accommodate our growth.

Net gains on mortgage loans held for sale at fair value

During the year ended December 31, 2014,that we recognized net gains on mortgage loans held for sale at fair value totaling $167.0 million, compared to $138.0 million and $118.2 million during the years ended December 31, 2013 and 2012, respectively.estimated using their quoted market price or market price equivalent.

The increase in net gains on mortgage loans held for sale at fair value in 2014 was due to improvement in production margins along with growth in the volume of·

We categorize mortgage loans that we purchased and originated and subsequently sold compared to 2013. The increase in net gains onare not saleable into active markets as “Level 3” fair value assets. “Level 3” fair value mortgage loans held for sale at fair value in 2013 was due to the growth in the volume of interest rate lock commitments partially offset by increasing price competition in the mortgage market, which had a negative effect on our production margins compared to 2012. The net gain for the years ended December 31, 2014, 2013 and 2012 included $207.9 million, $205.1 million and $90.5 million, respectively, in fair value of MSRs received as part of proceeds on sales, net of mortgage servicing liabilities incurred.arise primarily from two sources:

 

-

We have been able to sustain our margins through growth in our consumer direct mortgage loan activities, which generally produce higher margins than correspondent activities. The margins on correspondent government-insuredmay purchase certain delinquent government guaranteed or guaranteedinsured mortgage loans have not been adversely affected over recent periods as much as conventional correspondent production. Government-insured orfrom Ginnie Mae guaranteed mortgage lending is not as competitive as conventional conforming mortgage lending due to the added complexity involvedpools in the origination and servicing of government-insured or guaranteed mortgage loans.

Our net gains on mortgage loans held for sale include both cash and non-cash elements. We receive proceeds on sale that include both cash and MSRs. We also recognize a liability for our estimate of the losses we expect to incur in the future as a result of claims against us in connection with the representations and warranties that we made in the loan sales transactions.

53


Our gains on mortgage loans held for sale are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

    

2014

    

2013

    

2012

 

 

 

(in thousands)

 

Cash (loss) gain:

 

 

                       

 

 

                       

 

 

                       

 

Sales proceeds

 

$

43,665 

 

$

(150,589)

 

$

78,671 

 

Hedging activities

 

 

(90,507)

 

 

98,707 

 

 

(70,916)

 

 

 

 

(46,842)

 

 

(51,882)

 

 

7,755 

 

Non-cash gain:

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights resulting from mortgage loan sales

 

 

209,850 

 

 

205,105 

 

 

90,472 

 

Mortgage servicing liabilities resulting from mortgage loan sales

 

 

(1,965)

 

 

 —

 

 

 —

 

Mortgage servicing rights recapture payable to PennyMac Mortgage Investment Trust

 

 

(7,837)

 

 

(709)

 

 

 —

 

Provision for losses relating to representations and warranties on loans sold

 

 

(5,291)

 

 

(4,675)

 

 

(3,055)

 

Change in fair value relating to mortgage loans and hedging derivatives held at year end:

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

25,640 

 

 

(17,179)

 

 

16,035 

 

Mortgage loans

 

 

12,733 

 

 

(4,207)

 

 

4,030 

 

Hedging derivatives

 

 

(19,264)

 

 

11,560 

 

 

2,933 

 

 

 

$

167,024 

 

$

138,013 

 

$

118,170 

 

During the year:

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance of mortgage loans sold

 

$

17,928,780 

 

$

16,401,282 

 

$

8,545,915 

 

Interest rate lock commitments issued, net of cancellations:

 

 

 

 

 

 

 

 

 

 

Conventional mortgage loans

 

$

1,341,492 

 

$

989,350 

 

$

702,387 

 

Government-insured or guaranteed loans

 

 

18,248,212 

 

 

14,816,066 

 

 

9,413,801 

 

 

 

$

19,589,704 

 

$

15,805,416 

 

$

10,116,188 

 

Year end:

 

 

 

 

 

 

 

 

 

 

Mortgage loans held for sale at fair value

 

$

1,147,884 

 

$

531,004 

 

$

448,384 

 

Commitments to fund and purchase mortgage loans

 

$

1,765,597 

 

$

971,783 

 

$

1,576,174 

 

Provision for Losses Under Representations and Warranties

We record our estimate of the losses that we expect to incur in the future as a result of claims against us in connection with the representations and warranties provided to the purchasers of the loans we sold in our Net gains on sale of mortgage loans held for sale at fair value. Our agreements with the Agencies include representations and warranties related to the loans we sell to the Agencies. The representations and warranties require adherence to Agency 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 mortgage loans with the identified defects or indemnify the investor or insurer. In such cases, we bear any subsequent credit loss on the mortgage loans. Our credit loss may be reduced by any recourse we have to correspondent lenders that sold such mortgage loans 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 lender.

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 defaults 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, 2014, 2013 and 2012, we recorded provisions for losses under representations and warranties totaling $5.3 million, $4.7 million and $3.1 million, respectively. The increase in 2014

54


was primarily due to an increase in the volume of loan sales activity during the year and an increase in the aggregate loan sales over time.

Following is a summary of mortgage loan repurchase activity and the unpaid balance of mortgage loans subject to representations and warranties:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

    

2014

    

2013

    

2012

 

 

 

(in thousands)

 

During the year:

 

 

                       

 

 

                       

 

 

                       

 

Indemnification activity

 

 

 

 

 

 

 

 

 

 

Indemnified mortgage loans at beginning of year

 

$

80 

 

$

 —

 

$

 —

 

New indemnifications

 

 

1,441 

 

 

80 

 

 

 —

 

Indemnified mortgage loans repurchased

 

 

 —

 

 

 —

 

 

 —

 

Indemnified mortgage loans repaid or refinanced

 

 

 —

 

 

 —

 

 

 —

 

Indemnified mortgage loans at end of year

 

$

1,521 

 

$

80 

 

$

 —

 

Repurchase activity

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance of mortgage loans repurchased

 

$

2,742 

 

$

4,880 

 

$

738 

 

Less: Unpaid principal balance of mortgage loans repurchased by correspondent lenders

 

 

2,451 

 

 

3,114 

 

 

505 

 

Less: Mortgage loans repaid by borrowers

 

 

138 

 

 

303 

 

 

 —

 

Mortgage loans with losses chargeable to liability for representations and warranties

 

$

153 

 

$

1,463 

 

$

233 

 

Losses charged to liability for representations and warranties

 

$

155 

 

$

56 

 

$

 —

 

Year end:

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance of mortgage loans subject to representations and warranties

 

$

37,014,687 

 

$

23,637,202 

 

$

8,856,044 

 

Liability for representations and warranties

 

$

13,259 

 

$

8,123 

 

$

3,504 

 

During the year ended December 31, 2014, we repurchased mortgage loans with unpaid principal balances totaling $2.7 million and charged $155,000 in incurred losses relating to these repurchases against our liability for representations and warranties. As the outstanding balance of loans we purchase and sell subject to representations and warranties increases and the loans sold continue to season, we expect the level of repurchase activity to increase.

We did not record any adjustments to previously recorded liabilities for representations and warranties during any of the periods presented.

Other Loan Production-Related Revenues

Loan origination fees increased $18.0 million during the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase was primarily due to increases in certain fees we charge in our loan production activities.

During the years ended December 31, 2013 and 2012, loan origination fees increased $13.9 million and $9.0 million, respectively, due to growth in the volume of loans produced.

55


Loan fulfillment fees from PMT represent fees we collect for services we perform on behalf of PMT in connection with its acquisition, packaging and sale of mortgage loans. The loan fulfillment fees are calculated as a percentage of the UPB of the mortgage loans we fulfill for PMT. Fulfillment fees decreased $31.0 million in 2014 compared to 2013, due to reductions in the volume of Agency-eligible mortgage loans we fulfilled on behalf of PMT and a combination of contractual and discretionary reductions in the fulfillment fee rate charged to PMT. Summarized below are our fulfillment fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

    

2014

    

2013

    

2012

 

 

 

(in thousands)

 

Fulfillment fee revenue

 

$

48,719 

 

$

79,712 

 

$

62,906 

 

Unpaid principal balance of loans fulfilled

 

$

11,476,448 

 

$

15,225,153 

 

$

13,028,375 

 

Average fulfillment fee rate (in basis points)

 

 

42 

 

 

52 

 

 

48 

 

Net loan servicing fees

Our net loan servicing fees are summarized below.

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

    

2014

    

2013

    

2012

 

 

 

(in thousands)

 

Net servicing fees:

 

 

 

 

 

 

 

 

 

 

Loan servicing fees

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

$

173,005 

 

$

61,523 

 

$

20,673 

 

From PennyMac Mortgage Investment Trust

 

 

52,522 

 

 

39,413 

 

 

18,608 

 

From Investment Funds

 

 

6,425 

 

 

7,099 

 

 

10,831 

 

Ancillary and other fees

 

 

26,469 

 

 

11,426 

 

 

2,245 

 

 

 

 

258,421 

 

 

119,461 

 

 

52,357 

 

Amortization, impairment and change in fair value of mortgage servicing rights

 

 

(41,502)

 

 

(29,451)

 

 

(12,252)

 

Net servicing fees

 

$

216,919 

 

$

90,010 

 

$

40,105 

 

Average servicing portfolio

 

$

91,887,504 

 

$

46,505,057 

 

$

14,554,116 

 

56


Following is a summary of our mortgage loan servicing portfolio:portfolio. Our right to purchase such mortgage loans arises as the result of the borrower’s failure to make payments for three consecutive months preceding the month that we repurchase the mortgage loan and provides 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 loans” or “EBO”) have not become saleable into another Ginnie Mae guaranteed security by becoming current either through the borrower’s reperformance or through completion of a modification of the mortgage loan’s terms, we measure such mortgage loans using “Level 3” fair value inputs.

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

    

2014

    

2013

 

 

 

(in thousands)

 

Mortgage loans serviced at period end:

 

 

 

 

 

 

 

Prime servicing:

 

 

 

 

 

 

 

Owned

 

 

 

 

 

 

 

Mortgage servicing rights

 

 

 

 

 

 

 

Originated

 

$

36,564,434 

 

$

22,499,847 

 

Acquired

 

 

28,126,179 

 

 

22,469,179 

 

 

 

 

64,690,613 

 

 

44,969,026 

 

Mortgage servicing liabilities

 

 

478,581 

 

 

 —

 

Mortgage loans held for sale

 

 

1,100,910 

 

 

506,540 

 

 

 

 

66,270,104 

 

 

45,475,566 

 

Subserviced for Advised Entities

 

 

35,416,466 

 

 

26,788,479 

 

Total prime servicing

 

 

101,686,570 

 

 

72,264,045 

 

Special servicing:

 

 

 

 

 

 

 

Subserviced for Advised Entities

 

 

4,293,479 

 

 

4,844,239 

 

Subserviced for non-affiliates

 

 

 —

 

 

89,361 

 

 

 

 

4,293,479 

 

 

4,933,600 

 

Owned mortgage servicing rights—Acquired

 

 

 —

 

 

969,794 

 

Total special servicing

 

 

4,293,479 

 

 

5,903,394 

 

Total mortgage loans serviced

 

$

105,980,049 

 

$

78,167,439 

 

During the year ended December 31, 2014, loan servicing fees increased $139.0 million, or 116%, when compared to the year ended December 31, 2013. The increase during the year was due to:-

·

an increase of $111.5 million in loan servicing fees from non-affiliates resulting from growth in our portfolio of loans serviced due to purchases of MSRs supplemented with the ongoing sales of mortgage loans with servicing rights retained, partially offset by the sale of MSRs relating to a portfolio backed by distressed mortgage loans;

·

an increase of $12.4 million in loan servicing fees from our Advised Entities primarily due to activity-based fees, relating to their sale of reperforming mortgage loans along with continuing growth in PMT’s MSR portfolio which we subservice; and

·

an increase of $15.0 million in ancillary fees due to growth in the portfolios of mortgage loans serviced.

The increase in servicing fees during the year ended December 31, 2013 as compared to the year ended December 31, 2012 was similarlyCertain of our mortgage loans may become non-saleable into active markets due to growth in our and PMT’s servicing portfolios.

57


Tableidentification of Contentsone or more defects. Because such mortgage loans are generally not saleable into active mortgage markets, we classify them as “Level 3” fair value assets.

At December 31, 2016, we held $47.3 million of “Level 3” fair value mortgage loans.

The significant unobservable inputs used in the fair value measurement of our “Level 3” fair value mortgage loans held for sale are discount rates, home price projections, voluntary prepayment speeds and default speeds. Significant changes in any of those inputs in isolation could result in a significant change to the mortgage loans’ fair value measurement.

Interest Rate Lock Commitments

Our net gains on mortgage loans held for sale includes our estimates of the gains or losses we expect to realize upon the sale of mortgage loans we have contractually committed to fund or purchase but have not yet funded, purchased or sold. We recognize a substantial portion of our net gains on mortgage loans held for sale at fair value before we fund or purchase the mortgage loan as the result of these commitments. We call these commitments IRLCs. We recognize the fair value of IRLCs at the time we make the commitment to the correspondent seller or mortgage loan

48


Table of Contents

applicant and adjust the fair value of such IRLCs as the mortgage loan approaches the point of funding or purchase or the prospective transaction is canceled.

We carry IRLCs as either derivative assets or derivative liabilities on our consolidated balance sheet. The fair value of an IRLC is transferred to the fair value of mortgage loans held for sale at fair value when the mortgage loan is funded or purchased. At December 31, 2016, we held $65.8 million of IRLC assets at fair value.

An active, observable market for IRLCs does not exist. Therefore, we measure the fair value of IRLCs using methods we believe that market participants use in pricing IRLCs. We estimate the fair value of an IRLC based on observable Agency MBS prices, our estimates of the fair value of the MSRs we expect to receive in the sale of the mortgage loans and the probability that we will fund or purchase the mortgage loan (the “pull-through rate”).

Pull-through rates and MSR fair values are based on our estimates as these inputs are difficult to observe in the mortgage marketplace. Our estimate of the probability that a mortgage loan will be funded and market interest rates are updated as the mortgage loans move through the funding process and as mortgage market interest rates change and may result in significant changes in the estimates of the fair value of the IRLCs. Such changes are reflected in the change in fair value of IRLCs which is a component of our Net gains on mortgage loans held for sale at fair value in the period of the change. The financial effects of changes in these inputs are generally inversely correlated. Increasing mortgage interest rates have a positive effect on the fair value of the MSR component of IRLC fair value but increase the pull-through rate for the mortgage loan principal and interest payment cash flow component, which has decreased in fair value.

A shift in our assessment of an input to the valuation of IRLCs can have a significant effect on the amount of Net gains on sale of mortgage loans held for sale for the period. We believe that the most significant “Level 3” fair value input to the measurement of IRLCs is the pull-through rate. Following is a quantitative summary of the effect of changes in the pull-through rate input on the fair value of IRLCs:

 

 

 

 

 

Shift in input

 

Effect on fair value of IRLC of a change in pull-through rate

 

 

 

(in thousands)

5

 

$

3,183
10

 

$

6,073
20

 

$

11,218
(5)

 

$

(3,864)
(10)

 

$

(7,728)
(20)

 

$

(15,456)

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 and Mortgage Servicing Liabilities (“MSLs”)

MSRs and MSLs represent the value assigned to a contract that obligates us to service the mortgage loans on behalf of the owner of the mortgage loan in exchange for servicing fees and the right to collect certain ancillary income from the borrower. We initially recognize MSRs at our estimate of the fair value of the contract to service the loans. At December 31, 2016, we held $1.6 billion of carrying value of MSRs net of MSLs.

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As economic fundamentals influencing the underlying mortgage loans change, our estimate of the fair value of the related MSR or MSL we hold will also change. As a result, we will record changes in fair value for the MSRs and MSLs we carry at fair value, and we may recognize changes in fair value relating to our MSRs carried at the lower of amortized cost or fair value depending on the relationship of the MSR’s fair value to its carrying value at the measurement date.  These fair value changes will be recognized as a component of Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities. 

After the initial recognition of MSRs and MSLs, we account for such assets based on the class of MSRs: originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5%; originated MSRs backed by mortgage loans with initial interest rates of more than 4.5%; and purchased MSRs. We account for originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5% using the amortization method. Originated MSRs backed by loans with initial interest rates of more than 4.5% and purchased MSRs are accounted for at fair value with changes in fair value recorded in current period income. MSLs are accounted for at fair value with changes in fair value recorded in current period income.

MSRs Accounted for Using the Amortization Method

We amortize MSRs accounted for using the amortization method. MSR amortization is determined by applying the ratio of the net MSR cash flows projected for the current period to the estimated total remaining net MSR cash flows. The estimated total net MSR cash flows are determined at the beginning of each month using prepayment inputs applicable at that time.

We also evaluate MSRs accounted for using the amortization method for impairment with reference to the assets’ fair value at the measurement date. Impairment occurs when the current fair value of the MSR falls below the asset’s amortized cost. If MSRs are impaired, the impairment is recognized in current period income and the carrying value of the MSRs is adjusted through a valuation allowance. If the fair value of impaired MSRs subsequently increases, we recognize the increase in fair value in current period income and, through a reduction in the valuation allowance, adjust the carrying value of the MSRs to a level not in excess of amortized cost.

When evaluating MSRs for impairment, we stratify the assets by predominant fair value risk characteristic including loan type (fixed-rate or adjustable-rate) and note interest rate. We stratify fixed-rate mortgage loans into note interest rate pools of 50 basis points for note interest rates between 3.0% and 4.5% and a single pool for note interest rates of less than or equal to 3.0%. We evaluate adjustable-rate mortgage loans with initial interest rates of 4.5% or less in a single pool. Amortization and impairment of MSRs accounted for using the amortization method are included in current period income as a component of Net mortgage loan servicing fees. During the year ended December 31, 2016, we recognized $60.5 million in impairment of MSRs accounted for using the amortization method.

We periodically review the various impairment strata to determine whether the fair value of the impaired MSRs in a given stratum is likely to recover. When we conclude that recovery of the value is unlikely in the foreseeable future, a write-down of the cost of the MSRs for that stratum to its estimated recoverable value is charged to the valuation allowance. During the year ended December 31, 2016, we recognized $12.8 million in write-downs of MSRs.

MSRs and MSLs Accounted for at Fair Value

We include changes in fair value of MSRs and MSLs accounted for at fair value in current period income as a component of Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities. During the year ended December 31, 2016, we recognized a $146.0 million net reduction in fair value of MSRs and MSLs accounted for at fair value.

A shift in the market for MSRs and MSLs or a change in our assessment of an input to the valuation of MSRs and MSLs can have a significant effect on their fair value and in our income for the period. We believe the most significant “Level 3” fair value inputs to the valuation of MSRs and MSLs are the pricing spread (discount rate), prepayment speed and annual per-loan cost of servicing.

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Following is a summary of the effect on fair value of MSRs  (which totaled $1.6 billion at December 31, 2016) of various changes to these key inputs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect on fair value of MSRs of a change in input value

 

Shift in input

   

Pricing spread

   

Prepayment speed

   

Servicing cost

 

 

 

 

(in thousands)

 

5

 

$

(31,479)

 

$

(25,454)

 

$

(14,502)

 

10

 

$

(61,761)

 

$

(50,086)

 

$

(29,006)

 

20

 

$

(118,980)

 

$

(97,046)

 

$

(58,012)

 

(5)

 

$

32,744

 

$

26,318

 

$

14,502

 

(10)

 

$

66,826

 

$

53,545

 

$

29,006

 

(20)

 

$

139,320

 

$

110,928

 

$

58,012

 

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. Furthermore, certain of our MSRs are accounted for using the amortization method and are carried at the lower of amortized cost or fair value. Such assets’ carrying value may not be immediately affected as a result of a change in input values depending on the carrying value of the MSR asset before the change in input occurs and whether the input change causes our estimate of fair value to change to a level below the amortized cost of those MSRs. 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

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 the level specified in the sale agreement. We carry our excess servicing spread financing (“ESS”) at fair value. At December 31, 2016, we carried $288.7 million of fair value of ESS.

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 ESS 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 excess servicing spread in Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities. During the year ended December 31, 2016, we recorded $23.9 million of net reduction in fair value of ESS.

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We believe that the most significant “Level 3” fair value inputs to the valuation of ESS are the pricing spread (discount rate) and prepayment speed. Following is a summary of the effect on fair value of various changes to these inputs:

 

 

 

 

 

 

 

 

 

 

 

Effect on excess servicing spread of a change in input value

Shift in input

 

Pricing spread

 

Prepayment speed

 

 

 

(in thousands)

5

 

$

(2,748)

 

$

(6,386)
10

 

$

(5,445)

 

$

(12,516)
20

 

$

(10,691)

 

$

(24,067)
(5)

 

$

2,800

 

$

6,657
(10)

 

$

5,654

 

$

13,602
(20)

 

$

11,529

 

$

28,430

The preceding analyses hold constant all of the inputs other than the input that is being changed to show an estimate of the effect on fair value of a change in that specific input. We expect that in a market shock event, multiple inputs would be affected and the effects of these changes may compound or counteract each other. Therefore the preceding analyses are not projections of the effects of a shock event or a change in our estimate of an input and should not be relied upon as earnings projections.

Critical Accounting Policy Not Based on Fair Value- Liability for Losses Under Representations and Warranties

We record a provision for losses relating to our representations and warranties as part of our mortgage loan sale transactions. The method we use to estimate the liability for representations and warranties is a function of the representations and warranties given and considers a combination of factors, including, but not limited to, estimated future default and mortgage loan repurchase rates, the potential severity of loss in the event of default and, if applicable, the probability of reimbursement by the correspondent mortgage loan seller. We establish a liability at the time loans are sold and periodically update our liability estimate.  At December 31, 2016, the balance of our liability for losses under representations and warranties totaled $19.1 million.

The level of the liability for losses under representations and warranties is difficult to estimate and requires considerable management judgment. The level of mortgage loan repurchase losses is dependent on economic factors, purchaser or insurer loss mitigation strategies, and other external conditions that may change over the lives of the underlying mortgage loans.  Our estimate of the liability for representations and warranties is developed by our credit administration staff. The liability estimate is reviewed and approved by our senior management credit committee which includes the senior executives of the Company and of the loan production, loan servicing and credit risk management areas.

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 results of operations. During the year ended December 31, 2016, we recorded reductions to our previously recorded representations and warranties liability amounts totaling $7.7 million.

Accounting Developments

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2014-09, Revenue from Contracts with Customers (Subtopic 606)(“ASU 2014-09”), which supersedes the guidance in the revenue recognitiontopic of its Accounting Standards Codification (the “ASC”). ASU 2014-09 clarifies the principles for recognizing revenue in order to improve comparability of revenue recognition practices across entities

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and industries with certain scope exceptions including financial instruments, leases, and guarantees. ASU 2014-09 provides guidance intended to assist in the identification of contracts with customers and separate performance obligations within those contracts, the determination and allocation of the transaction price to those identified performance obligations and the recognition of revenue when a performance obligation has been satisfied. ASU 2014-09 also requires disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers.

Upon adoption, ASU 2014-09 provides for transition through either a full retrospective approach requiring the restatement of all presented prior periods or a modified retrospective approach, which allows the new recognition standard to be applied to only those contracts that are not completed at the date of transition. If the modified retrospective approach is adopted, a cumulative-effect adjustment to retained earnings is performed with additional disclosures required including the amount by which each line item is affected by the transition as compared to the guidance in effect before adoption and an explanation of the reasons for significant changes in these amounts.

The FASB has issued several amendments to ASU 2014-09, including:

·

In May 2014, ASU 2015-14, Revenue From Contracts with Customers (“ASU 2015-14”). This update deferred the initial effective date of ASU 2014-09. As a result of the issuance of ASU 2015-14, ASU 2014-09 is effective for annual reporting periods beginning on or after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

·

In March 2015, ASU 2016-08, Principal Versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments to this update are intended to improve the implementation guidance on principal versus agent considerations in ASU 2014-09 by clarifying how an entity should identify the unit of account (i.e. the specified good or service) and how an entity should apply the control principle to certain types of arrangements.

·

In May 2016, ASU 2016-12, Narrow-Scope Improvements and Practical Expedients. The amendments to this update clarify certain core recognition principles and provide practical expedients available at transition. The improvements address collectability, sales tax presentation, noncash consideration, contract modifications and completed contracts at transition.

·

In December 2016, ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue From Contracts with Customers. The amendments to this update affect narrow aspects of the guidance issued in ASU 2014-09. The amendments remove certain items under its scope and clarify application of certain principles. The amendments address loan guarantee fees, contracts costs impairment testing, provisions for losses on construction, insurance contracts, disclosure of remaining performance obligations, contract modifications, contract asset versus receivable, refund liability, advertising cost, fixed-odds wagering contracts in the casino industry and cost capitalization for advisor to private funds and public funds.

The Company expects that upon adoption, the guidance currently applied by the Company to its Carried Interest may be affected. The Company’s Carried Interest arrangements with the Investment Funds represent capital allocations to PFSI. The Company is currently evaluating whether the nature and substance of its Carried Interest arrangements are within the scope of ASU 2014-09, or whether such Carried Interest should be accounted for under the equity method of accounting under the Investments Equity Method and Joint Ventures topic of the ASC.

If the Company concludes the Carried Interest should be accounted for under the equity method of accounting, Carried Interest would be accounted for as a financial instrument and the amount recognized by the Company would not change significantly.  The Company is still determining the potential additional effects of ASU 2014-09 on its financial

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statements for other arrangements that may be within the scope of ASU 2014-09.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related note disclosures.

Under GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. Financial reporting under this presumption is commonly referred to as the going concern basis of accounting. The going concern basis of accounting establishes the fundamental basis for measuring and classifying assets and liabilities.

Under ASU 2014-15, an entity would be required to evaluate its status as a going concern as part of its periodic financial statement preparation process and would be required to disclose information about its potential inability to continue as a going concern when “substantial doubt” about its ability to continue as a going concern for the period of one year from the earlier of the date its financial statements are issued or are ready to be issued.

If management concludes that there is “substantial doubt” about the entity’s ability to continue as a going concern, it must disclose the principal conditions or events causing substantial doubt to be raised, management’s evaluation of the conditions and management’s plans. If substantial doubt is not alleviated as a result of management’s plans, the company is required to include a statement that there is “substantial doubt about the entity’s ability to continue as a going concern.” ASU 2014-15 also requires an entity to disclose how the substantial doubt was resolved in the period that substantial doubt no longer exists.

ASU 2014-15 is effective for the annual period ending December 31, 2016. The adoption of ASU 2014-15 did not have an effect on the financial statements of the Company.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are Variable Interest Entities (“VIEs”) or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company adopted ASU 2015-02 effective January 1, 2016. The adoption of ASU 2015-02 had no effect on the Company’s consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 affects the accounting for equity investments, financial liabilities under the fair value option, the presentation and disclosure requirements for financial instruments, and the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities.

ASU 2016-01 requires that:

·

All equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) with readily determinable fair values will generally be measured at fair value through earnings.

·

When the fair value option has been elected for financial liabilities, changes in fair value of mortgage servicing rights are summarized below:due to instrument-specific credit risk will be recognized separately in other comprehensive income. The accumulated gains and losses due to these changes will be reclassified from accumulated other comprehensive income to earnings if the financial liability is settled before maturity.

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Year ended December 31,

 

 

    

2014

    

2013

    

2012

 

 

 

 

(in thousands)

 

Amortization and realization of cash flows

 

$

(72,660)

 

$

(24,752)

 

$

(9,163)

 

Change in fair value and reversal of (provision for) impairment of mortgage servicing rights carried at lower of amortized cost or fair value

 

 

(24,345)

 

 

(985)

 

 

(4,458)

 

 

 

 

(97,005)

 

 

(25,737)

 

 

(13,621)

 

Change in fair value of excess servicing spread

 

 

28,663 

 

 

(2,423)

 

 

 —

 

Hedging gains (losses)

 

 

26,840 

 

 

(1,291)

 

 

1,369 

 

Total amortization, impairment and change in fair value of mortgage servicing rights

 

$

(41,502)

 

$

(29,451)

 

$

(12,252)

 

Ending mortgage servicing rights:

 

 

 

 

 

 

 

 

 

 

At lower of amortized cost or fair value

 

$

405,445 

 

$

258,751 

 

$

89,177 

 

At fair value

 

 

325,383 

 

 

224,913 

 

 

19,798 

 

 

 

$

730,828 

 

$

483,664 

 

$

108,975 

 

Average MSR balances:

 

 

 

 

 

 

 

 

 

 

At lower of amortized cost or fair value

 

$

321,049 

 

$

176,138 

 

$

39,681 

 

At fair value

 

 

277,313 

 

 

46,384 

 

 

22,835 

 

 

 

$

598,362 

 

$

222,522 

 

$

62,516 

 

Amortization, impairment and change in·

For financial instruments measured at amortized cost, public business entities will be required to use the exit price when measuring the fair value of mortgage servicing rights increased $12.1 millionfinancial instruments for disclosure purposes.

·

Financial assets and financial liabilities shall be presented separately in the year ended December 31, 2014 comparednotes to the year ended December 31, 2013. The increase in Amortization, impairmentfinancial statements, grouped by measurement category (e.g., fair value, amortized cost, lower of cost or fair value) and change inform of financial asset (e.g., loans, securities).

·

Public business entities will no longer be required to disclose the methods and significant assumptions used to estimate the fair value of mortgage servicing rights was primarily duefinancial instruments carried at amortized cost.

·

Entities will have to growthassess the realizability of a deferred tax asset related to a debt security classified as available for sale in our investmentcombination with the entity’s other deferred tax assets.

The classification and measurement guidance will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption of the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income is permitted and can be elected for all financial statements of fiscal years and interim periods that have not yet been issued or that have not yet been made available for issuance. The Company does not expect the adoption of ASU 2016-01to have a significant effect on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”).  ASU 2016-02 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors) and supersedes previous leasing standards. ASU 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether the lease is effectively a financed purchase of the leased asset by the lessee. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. 

ASU 2016-02 is effective for the Company for reporting periods beginning after December 15, 2018, with early adoption permitted. As shown in Note 24 - Commitments and Contingencies, the Company had approximately $100.8 million in future minimum lease payment commitments as of December 31, 2016. Were the Company to adopt ASU 2016-02 as of December 31, 2016, it would be required to recognize a right-of-use asset and a corresponding liability based on the present value of such obligation as of December 31, 2016. The Company does not expect to recognize a significant cumulative effect adjustment to its stockholders’ equity as a result of adopting ASU 2016-02.

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation(Topic 718):  Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment award transactions, including:

·

Modifies the accounting for income taxes relating to share-based payments. All excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) will be recognized as income tax expense or benefit in MSRs,the consolidated income statement. The tax effects of exercised or vested awards will be treated as discrete items in the reporting period in which causedthey occur. An entity will recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Under current GAAP, excess tax benefits are recognized in additional paid-in capital; tax deficiencies are recognized either as an increaseoffset to accumulated excess tax benefits, if any, or in amortizationthe consolidated income statement in the period they reduce income taxes payable.

·

Changes the classification of excess tax benefits on the consolidated statement of cash flows. In the consolidated statement of cash flows, excess tax benefits will be classified along with other income tax cash flows as an operating activity. Under current GAAP, excess tax benefits are separated from other income tax cash flows and classified as a financing activity.

·

Changes the requirement to estimate the number of awards that are expected to vest. Under ASU 2016-09, an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest as presently required or account for forfeitures when they occur.

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Under current GAAP, accruals of compensation cost are based on the number of awards that are expected to vest.

·

Changes the tax withholding requirements for share-based payment awards to qualify for equity accounting. The threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions. Under current GAAP, for an award to qualify for equity classification is that an entity cannot partially settle the award in cash in excess of the asset, and to impairment, reflecting expectationsemployer’s minimum statutory withholding requirements.

·

Establishes GAAP for higher prepayment speedsthe classification of employee taxes paid when an employer withholds shares for tax withholding purposes. Cash paid by an employer when directly withholding shares for tax- withholding purposes should be classified as a resultfinancing activity. This guidance establishes GAAP related to the classification of lower interest rates throughout mostwithholding taxes in the statement of 2014; partially offset with an increase in fair value of ESS financing and hedging gains.cash flows as there is no such guidance under current GAAP.

ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any organization in any interim or annual period. The Company does not expect the adoption of ASU 2016-09 to have a significant effect on its stock-based compensation expense or on previously recognized paid-in capital relating to such expense.

 

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Management fees and Carried Interest

 

Management fees and

23,726

30,865

48,664

53,749

32,272

Net interest expense

(25,079)

(19,382)

(9,486)

(1,041)

(1,525)

Other

3,995

1,242

4,861

2,541

3,524

Total net revenue

931,887

713,110

518,277

386,559

265,086

Expenses

Compensation

342,153

274,262

190,707

148,576

124,014

Servicing

85,857

68,085

48,430

7,028

3,642

Other

120,794

91,570

56,107

48,829

19,107

Total expenses

548,804

433,917

295,244

204,433

146,763

Income before provision for income taxes

383,083

279,193

223,033

182,126

118,323

Provision for income taxes

46,103

31,635

26,722

9,961

 —

Net income

336,980

247,558

196,311

172,165

$

118,323

Less: Net income attributable to noncontrolling interest

270,901

200,330

159,469

157,765

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

$

66,079

$

47,228

$

36,842

$

14,400

Condensed Consolidated Balance Sheets:

Assets

Mortgage loans held for sale at fair value

$

2,172,815

$

1,101,204

$

1,147,884

$

531,004

$

448,384

Mortgage servicing rights

1,627,672

1,411,935

730,828

483,664

108,975

Carried Interest are summarized below:due from Investment Funds

70,906

69,926

67,298

61,142

47,723

Servicing advances

348,306

299,354

228,630

154,328

93,152

Other

914,203

622,875

332,046

354,337

133,929

Total assets

$

5,133,902

$

3,505,294

$

2,506,686

$

1,584,475

$

832,163

Liabilities and stockholders' equity

Assets sold under agreements to repurchase

$

1,735,114

$

1,166,731

$

822,252

$

471,592

$

393,534

Mortgage loan participation and sale agreements

671,426

234,872

143,568

 —

 —

Notes payable

150,942

61,136

146,855

52,154

53,013

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

288,669

412,425

191,166

138,723

 —

Other

888,395

567,780

395,579

292,802

123,866

Total liabilities

3,734,546

2,442,944

1,699,420

955,271

570,413

Stockholders' equity

1,399,356

1,062,350

807,266

629,204

261,750

Total liabilities and stockholders' equity

$

5,133,902

$

3,505,294

$

2,506,686

$

1,584,475

$

832,163

Earnings Per Share of Common Stock (1):

Basic

$

2.98

$

2.17

$

1.73

$

0.83

Diluted

$

2.94

$

2.17

$

1.73

$

0.82

Year end Share:

Book value per share

$

15.49

$

12.32

$

9.92

$

8.04

Share price

$

16.65

$

15.36

$

17.30

$

17.55

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Table of Contents


(1)

After we completed our IPO on May 14, 2013, the earnings per share of common stock calculation became applicable.

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Observations on Current Market Conditions

 

Our business is affected by macroeconomic conditions in the United States, including economic growth, unemployment rates, the residential housing market and interest rate levels and expectations. The U.S. economy continues to grow, albeit at a modest pace, as reflected in recent economic data. During 2016, U.S. real gross domestic product expanded at an annual rate of 1.9% compared to 0.9% for 2015. The national seasonally adjusted unemployment rate was 4.7% at December 31, 2016, 5.0% at December 31, 2015 and 5.6% at December 31, 2014. Delinquency rates on residential real estate loans remain somewhat elevated compared to historical rates, but have been steadily declining. As reported by the Federal Reserve Bank, during the third quarter of 2016, the delinquency rate on residential real estate loans held by commercial banks was 4.3%, a reduction from 5.2% during the fourth quarter of 2015.

Residential real estate activity remains strong. The seasonally adjusted annual rate of existing home sales for December 2016 was 1.5% higher than for December 2015, and the national median existing home price for all housing types was $233,500, a 3.8% increase from December 2015 (Source: National Association of Realtors®). On a national level, foreclosure filings during 2016 decreased by 14% as compared to 2015. However, foreclosure activity is expected to remain above historical average levels through 2017 and beyond.

Changes in fixed-rate residential mortgage loan interest rates generally follow changes in long-term U.S. Treasury yields. Following the U.S. presidential election, an increase in Treasury yields led to an increase in mortgage loan interest rates. In addition, the Federal Open Market Committee (FOMC) of the Federal Reserve announced a 25 basis point increase in the target range for the federal funds rate at the December 2016 meeting. Thirty-year fixed mortgage interest rates ranged from a low of 3.41% to a high of 4.32% during 2016, while during 2015 thirty-year fixed mortgage interest rates ranged from a low of 3.59% to a high of 4.09% (Source: Freddie Mac’s Weekly Primary Mortgage Market Survey).

Mortgage lenders originated an estimated $1.9 trillion of home loans during 2016, up 12% from 2015. Total mortgage originations are forecast to be lower in 2017 versus 2016, with current industry estimates for 2017 averaging $1.5 trillion (Source: average of Fannie Mae, Freddie Mac and Mortgage Bankers Association forecasts).

We believe there is long-term market opportunity for the production of non-Agency jumbo mortgage loans. However, most new jumbo mortgage loans are either being originated or purchased by banks, and the current market for jumbo mortgage loan securitizations is limited, as evidenced by weak demand and inconsistent pricing observed during 2015 and 2016. Prime jumbo MBS securitizations totaled $4 billion in UPB during 2016, a decrease from $11 billion in 2015. During the year ended December 31, 2016, we produced approximately $14 million in UPB of jumbo loans compared to $124 million in UPB of jumbo loans produced during the year ended December 31, 2015.

In our capacity as an investment manager, we expect to see a continued supply of distressed whole loans; however, we believe the pricing for recent transactions has been less attractive for buyers. We are transitioning PMT’s portfolio away from distressed whole loans to correspondent-related investments such as CRT and MSRs, and we continue to monitor the market to assess optimal resolution opportunities for distressed portfolio investments held by the Advised Entities.

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.

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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:

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

Percentage of

 

Level/Description

 

Carrying value of
assets measured 

 

Total assets

 

Total stockholders' equity

 

 

 

   

(in thousands)

    

 

 

 

 

Level 1:

Prices determined using quoted prices in active markets for identical assets or liabilities.

 

$

90,504

 

2%

 

6%

 

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. These may include quoted prices for similar assets or liabilities, interest rates, prepayment speeds, credit risk and others.

 

 

2,235,924

 

44%

 

160%

 

Level 3:

Prices determined using significant unobservable inputs. In situations where observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the year), unobservable inputs may be used. Unobservable inputs reflect our assumptions about the factors that market participants use in pricing an asset or liability, and are based on the best information available in the circumstances.

 

 

1,742,209

 

34%

 

125%

 

Total assets measured at or based on fair value (1)

 

$

4,068,637

 

79%

 

291%

 

Total assets

 

$

5,133,902

 

 

 

 

 

Total stockholders' equity

 

$

1,399,356

 

 

 

 

 


(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 item 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, 2016, $2.9 billion or 57% of our total assets were carried at fair value and $1.1 billion or 22% were carried based on their fair values (comprised of certain of our MSRs and real estate acquired in settlement of loans (“REO”) properties, which are carried at the lower of amortized cost or fair value). Of these assets carried at or based on fair value, $1.7 billion or 34% are measured using “Level 3” fair value inputs – significant inputs that are difficult to observe due to the illiquidity of the markets in which the assets are traded and the 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 results of operations.

As a result of the difficulty in observing certain significant valuation inputs affecting “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. Likewise, due to the general illiquidity of some of these assets and liabilities, 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 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”

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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 and approves the valuations. During 2016, our senior management valuation committee included our chief executive, financial, operating, business development, risk and asset/liability management officers.

The fair value of our IRLCs is developed by our Capital Markets Risk Management staff and is reviewed by our Capital Markets Operations group.

Following is a discussion of our approach to measuring the balance sheet items that are most affected by “Level 3” fair value estimates.

Mortgage Loans

We carry mortgage loans at their fair values. We recognize changes in the fair value of mortgage loans in current period income as a component of Net gains on mortgage loans held for sale at fair value. We estimate the fair value of mortgage loans based on whether the mortgage loans are saleable into active markets with observable fair value inputs.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

 

2014

 

2013

 

2012

 

 

 

(in thousands)

 

Management fees:

 

 

 

 

 

 

 

 

 

 

PennyMac Mortgage Investment Trust:

 

 

 

 

 

 

 

 

 

 

Base management fee

    

$

23,330 

    

$

19,644 

    

$

12,436 

 

Performance incentive fee

 

 

11,705 

 

 

12,766 

 

 

 —

 

 

 

 

35,035 

 

 

32,410 

 

 

12,436 

 

Investment Funds

 

 

7,473 

 

 

7,920 

 

 

9,363 

 

Total management fees

 

 

42,508 

 

 

40,330 

 

 

21,799 

 

Carried Interest

 

 

6,156 

 

 

13,419 

 

 

10,473 

 

Total management fees and Carried Interest

 

$

48,664 

 

$

53,749 

 

$

32,272 

 

 

 

 

 

 

 

 

 

 

 

 

Net assets of Advised Entities at year end:

 

 

 

 

 

 

 

 

 

 

PennyMac Mortgage Investment Trust

 

$

1,578,172 

 

$

1,467,114 

 

$

1,201,336 

 

Investment Funds

 

 

424,182 

 

 

557,956 

 

 

591,154 

 

 

 

$

2,002,354 

 

$

2,025,070 

 

$

1,792,490 

 

·

58We categorize mortgage loans that are saleable into active markets as “Level 2” fair value assets. At December 31, 2016, we held $2.1 billion of such mortgage loans at fair value that we estimated using their quoted market price or market price equivalent.


 

Table

·

We categorize mortgage loans that are not saleable into active markets as “Level 3” fair value assets. “Level 3” fair value mortgage loans arise primarily from two sources:

-

We may purchase certain delinquent government guaranteed or insured mortgage loans from Ginnie Mae guaranteed pools in our mortgage loan servicing portfolio. Our right to purchase such mortgage loans arises as the result of Contents

Management fees from PMT increased $2.6 million during the borrower’s failure to make payments for three consecutive months preceding the month that we repurchase the mortgage loan and provides 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 loans” or “EBO”) have not become saleable into another Ginnie Mae guaranteed security by becoming current either through the borrower’s reperformance or through completion of a modification of the mortgage loan’s terms, we measure such mortgage loans using “Level 3” fair value inputs.

-

Certain of our mortgage loans may become non-saleable into active markets due to our identification of one or more defects. Because such mortgage loans are generally not saleable into active mortgage markets, we classify them as “Level 3” fair value assets.

At December 31, 2016, we held $47.3 million of “Level 3” fair value mortgage loans.

The significant unobservable inputs used in the fair value measurement of our “Level 3” fair value mortgage loans held for sale are discount rates, home price projections, voluntary prepayment speeds and default speeds. Significant changes in any of those inputs in isolation could result in a significant change to the mortgage loans’ fair value measurement.

Interest Rate Lock Commitments

Our net gains on mortgage loans held for sale includes our estimates of the gains or losses we expect to realize upon the sale of mortgage loans we have contractually committed to fund or purchase but have not yet funded, purchased or sold. We recognize a substantial portion of our net gains on mortgage loans held for sale at fair value before we fund or purchase the mortgage loan as the result of these commitments. We call these commitments IRLCs. We recognize the fair value of IRLCs at the time we make the commitment to the correspondent seller or mortgage loan

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applicant and adjust the fair value of such IRLCs as the mortgage loan approaches the point of funding or purchase or the prospective transaction is canceled.

We carry IRLCs as either derivative assets or derivative liabilities on our consolidated balance sheet. The fair value of an IRLC is transferred to the fair value of mortgage loans held for sale at fair value when the mortgage loan is funded or purchased. At December 31, 2016, we held $65.8 million of IRLC assets at fair value.

An active, observable market for IRLCs does not exist. Therefore, we measure the fair value of IRLCs using methods we believe that market participants use in pricing IRLCs. We estimate the fair value of an IRLC based on observable Agency MBS prices, our estimates of the fair value of the MSRs we expect to receive in the sale of the mortgage loans and the probability that we will fund or purchase the mortgage loan (the “pull-through rate”).

Pull-through rates and MSR fair values are based on our estimates as these inputs are difficult to observe in the mortgage marketplace. Our estimate of the probability that a mortgage loan will be funded and market interest rates are updated as the mortgage loans move through the funding process and as mortgage market interest rates change and may result in significant changes in the estimates of the fair value of the IRLCs. Such changes are reflected in the change in fair value of IRLCs which is a component of our Net gains on mortgage loans held for sale at fair value in the period of the change. The financial effects of changes in these inputs are generally inversely correlated. Increasing mortgage interest rates have a positive effect on the fair value of the MSR component of IRLC fair value but increase the pull-through rate for the mortgage loan principal and interest payment cash flow component, which has decreased in fair value.

A shift in our assessment of an input to the valuation of IRLCs can have a significant effect on the amount of Net gains on sale of mortgage loans held for sale for the period. We believe that the most significant “Level 3” fair value input to the measurement of IRLCs is the pull-through rate. Following is a quantitative summary of the effect of changes in the pull-through rate input on the fair value of IRLCs:

 

 

 

 

 

Shift in input

 

Effect on fair value of IRLC of a change in pull-through rate

 

 

 

(in thousands)

5

 

$

3,183
10

 

$

6,073
20

 

$

11,218
(5)

 

$

(3,864)
(10)

 

$

(7,728)
(20)

 

$

(15,456)

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 and Mortgage Servicing Liabilities (“MSLs”)

MSRs and MSLs represent the value assigned to a contract that obligates us to service the mortgage loans on behalf of the owner of the mortgage loan in exchange for servicing fees and the right to collect certain ancillary income from the borrower. We initially recognize MSRs at our estimate of the fair value of the contract to service the loans. At December 31, 2016, we held $1.6 billion of carrying value of MSRs net of MSLs.

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As economic fundamentals influencing the underlying mortgage loans change, our estimate of the fair value of the related MSR or MSL we hold will also change. As a result, we will record changes in fair value for the MSRs and MSLs we carry at fair value, and we may recognize changes in fair value relating to our MSRs carried at the lower of amortized cost or fair value depending on the relationship of the MSR’s fair value to its carrying value at the measurement date.  These fair value changes will be recognized as a component of Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities. 

After the initial recognition of MSRs and MSLs, we account for such assets based on the class of MSRs: originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5%; originated MSRs backed by mortgage loans with initial interest rates of more than 4.5%; and purchased MSRs. We account for originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5% using the amortization method. Originated MSRs backed by loans with initial interest rates of more than 4.5% and purchased MSRs are accounted for at fair value with changes in fair value recorded in current period income. MSLs are accounted for at fair value with changes in fair value recorded in current period income.

MSRs Accounted for Using the Amortization Method

We amortize MSRs accounted for using the amortization method. MSR amortization is determined by applying the ratio of the net MSR cash flows projected for the current period to the estimated total remaining net MSR cash flows. The estimated total net MSR cash flows are determined at the beginning of each month using prepayment inputs applicable at that time.

We also evaluate MSRs accounted for using the amortization method for impairment with reference to the assets’ fair value at the measurement date. Impairment occurs when the current fair value of the MSR falls below the asset’s amortized cost. If MSRs are impaired, the impairment is recognized in current period income and the carrying value of the MSRs is adjusted through a valuation allowance. If the fair value of impaired MSRs subsequently increases, we recognize the increase in fair value in current period income and, through a reduction in the valuation allowance, adjust the carrying value of the MSRs to a level not in excess of amortized cost.

When evaluating MSRs for impairment, we stratify the assets by predominant fair value risk characteristic including loan type (fixed-rate or adjustable-rate) and note interest rate. We stratify fixed-rate mortgage loans into note interest rate pools of 50 basis points for note interest rates between 3.0% and 4.5% and a single pool for note interest rates of less than or equal to 3.0%. We evaluate adjustable-rate mortgage loans with initial interest rates of 4.5% or less in a single pool. Amortization and impairment of MSRs accounted for using the amortization method are included in current period income as a component of Net mortgage loan servicing fees. During the year ended December 31, 2016, we recognized $60.5 million in impairment of MSRs accounted for using the amortization method.

We periodically review the various impairment strata to determine whether the fair value of the impaired MSRs in a given stratum is likely to recover. When we conclude that recovery of the value is unlikely in the foreseeable future, a write-down of the cost of the MSRs for that stratum to its estimated recoverable value is charged to the valuation allowance. During the year ended December 31, 2016, we recognized $12.8 million in write-downs of MSRs.

MSRs and MSLs Accounted for at Fair Value

We include changes in fair value of MSRs and MSLs accounted for at fair value in current period income as a component of Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities. During the year ended December 31, 2016, we recognized a $146.0 million net reduction in fair value of MSRs and MSLs accounted for at fair value.

A shift in the market for MSRs and MSLs or a change in our assessment of an input to the valuation of MSRs and MSLs can have a significant effect on their fair value and in our income for the period. We believe the most significant “Level 3” fair value inputs to the valuation of MSRs and MSLs are the pricing spread (discount rate), prepayment speed and annual per-loan cost of servicing.

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Following is a summary of the effect on fair value of MSRs  (which totaled $1.6 billion at December 31, 2016) of various changes to these key inputs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect on fair value of MSRs of a change in input value

 

Shift in input

   

Pricing spread

   

Prepayment speed

   

Servicing cost

 

 

 

 

(in thousands)

 

5

 

$

(31,479)

 

$

(25,454)

 

$

(14,502)

 

10

 

$

(61,761)

 

$

(50,086)

 

$

(29,006)

 

20

 

$

(118,980)

 

$

(97,046)

 

$

(58,012)

 

(5)

 

$

32,744

 

$

26,318

 

$

14,502

 

(10)

 

$

66,826

 

$

53,545

 

$

29,006

 

(20)

 

$

139,320

 

$

110,928

 

$

58,012

 

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. Furthermore, certain of our MSRs are accounted for using the amortization method and are carried at the lower of amortized cost or fair value. Such assets’ carrying value may not be immediately affected as a result of a change in input values depending on the carrying value of the MSR asset before the change in input occurs and whether the input change causes our estimate of fair value to change to a level below the amortized cost of those MSRs. 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

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 the level specified in the sale agreement. We carry our excess servicing spread financing (“ESS”) at fair value. At December 31, 2016, we carried $288.7 million of fair value of ESS.

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 ESS 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 excess servicing spread in Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities. During the year ended December 31, 2016, we recorded $23.9 million of net reduction in fair value of ESS.

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We believe that the most significant “Level 3” fair value inputs to the valuation of ESS are the pricing spread (discount rate) and prepayment speed. Following is a summary of the effect on fair value of various changes to these inputs:

 

 

 

 

 

 

 

 

 

 

 

Effect on excess servicing spread of a change in input value

Shift in input

 

Pricing spread

 

Prepayment speed

 

 

 

(in thousands)

5

 

$

(2,748)

 

$

(6,386)
10

 

$

(5,445)

 

$

(12,516)
20

 

$

(10,691)

 

$

(24,067)
(5)

 

$

2,800

 

$

6,657
(10)

 

$

5,654

 

$

13,602
(20)

 

$

11,529

 

$

28,430

The preceding analyses hold constant all of the inputs other than the input that is being changed to show an estimate of the effect on fair value of a change in that specific input. We expect that in a market shock event, multiple inputs would be affected and the effects of these changes may compound or counteract each other. Therefore the preceding analyses are not projections of the effects of a shock event or a change in our estimate of an input and should not be relied upon as earnings projections.

Critical Accounting Policy Not Based on Fair Value- Liability for Losses Under Representations and Warranties

We record a provision for losses relating to our representations and warranties as part of our mortgage loan sale transactions. The method we use to estimate the liability for representations and warranties is a function of the representations and warranties given and considers a combination of factors, including, but not limited to, estimated future default and mortgage loan repurchase rates, the potential severity of loss in the event of default and, if applicable, the probability of reimbursement by the correspondent mortgage loan seller. We establish a liability at the time loans are sold and periodically update our liability estimate.  At December 31, 2016, the balance of our liability for losses under representations and warranties totaled $19.1 million.

The level of the liability for losses under representations and warranties is difficult to estimate and requires considerable management judgment. The level of mortgage loan repurchase losses is dependent on economic factors, purchaser or insurer loss mitigation strategies, and other external conditions that may change over the lives of the underlying mortgage loans.  Our estimate of the liability for representations and warranties is developed by our credit administration staff. The liability estimate is reviewed and approved by our senior management credit committee which includes the senior executives of the Company and of the loan production, loan servicing and credit risk management areas.

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 results of operations. During the year ended December 31, 2016, we recorded reductions to our previously recorded representations and warranties liability amounts totaling $7.7 million.

Accounting Developments

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2014-09, Revenue from Contracts with Customers (Subtopic 606)(“ASU 2014-09”), which supersedes the guidance in the revenue recognitiontopic of its Accounting Standards Codification (the “ASC”). ASU 2014-09 clarifies the principles for recognizing revenue in order to improve comparability of revenue recognition practices across entities

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and industries with certain scope exceptions including financial instruments, leases, and guarantees. ASU 2014-09 provides guidance intended to assist in the identification of contracts with customers and separate performance obligations within those contracts, the determination and allocation of the transaction price to those identified performance obligations and the recognition of revenue when a performance obligation has been satisfied. ASU 2014-09 also requires disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers.

Upon adoption, ASU 2014-09 provides for transition through either a full retrospective approach requiring the restatement of all presented prior periods or a modified retrospective approach, which allows the new recognition standard to be applied to only those contracts that are not completed at the date of transition. If the modified retrospective approach is adopted, a cumulative-effect adjustment to retained earnings is performed with additional disclosures required including the amount by which each line item is affected by the transition as compared to the guidance in effect before adoption and an explanation of the reasons for significant changes in these amounts.

The FASB has issued several amendments to ASU 2014-09, including:

·

In May 2014, compared toASU 2015-14, Revenue From Contracts with Customers (“ASU 2015-14”). This update deferred the year ended December 31, 2013. The increase was due primarily to:

·

an increase in base management fees of $3.7 million due to an increase in PMT’s shareholders’ equity upon which its management fee is based; and

·

a decrease in performance incentive fees of $1.1 million because of PMT’s decrease in net income and increase in its shareholders’ equity.

Our incentive fee is based on how much PMT’s return on shareholders’ equity exceeds certain thresholds. Therefore, the increase in equity and decrease in earnings combined to reduce PMT’s return on equity and by extension the performance incentive fee we earned in 2014 as compared to 2013.

We began to recognize performance incentive fees asinitial effective date of ASU 2014-09. As a result of the amendmentissuance of ASU 2015-14, ASU 2014-09 is effective for annual reporting periods beginning on or after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

·

In March 2015, ASU 2016-08, Principal Versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments to our management agreementthis update are intended to improve the implementation guidance on principal versus agent considerations in ASU 2014-09 by clarifying how an entity should identify the unit of account (i.e. the specified good or service) and how an entity should apply the control principle to certain types of arrangements.

·

In May 2016, ASU 2016-12, Narrow-Scope Improvements and Practical Expedients. The amendments to this update clarify certain core recognition principles and provide practical expedients available at transition. The improvements address collectability, sales tax presentation, noncash consideration, contract modifications and completed contracts at transition.

·

In December 2016, ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue From Contracts with PMT effective February 1, 2013, which changedCustomers. The amendments to this update affect narrow aspects of the basisguidance issued in ASU 2014-09. The amendments remove certain items under its scope and clarify application of certain principles. The amendments address loan guarantee fees, contracts costs impairment testing, provisions for losses on which profitabilityconstruction, insurance contracts, disclosure of remaining performance obligations, contract modifications, contract asset versus receivable, refund liability, advertising cost, fixed-odds wagering contracts in the casino industry and cost capitalization for advisor to private funds and public funds.

The Company expects that upon adoption, the guidance currently applied by the Company to its Carried Interest may be affected. The Company’s Carried Interest arrangements with the Investment Funds represent capital allocations to PFSI. The Company is currently evaluating whether the nature and substance of its Carried Interest arrangements are within the scope of ASU 2014-09, or whether such Carried Interest should be accounted for under the equity method of accounting under the Investments Equity Method and Joint Ventures topic of the ASC.

If the Company concludes the Carried Interest should be accounted for under the equity method of accounting, Carried Interest would be accounted for as a financial instrument and the amount recognized by the Company would not change significantly.  The Company is still determining the potential additional effects of ASU 2014-09 on its financial

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statements for other arrangements that may be within the scope of ASU 2014-09.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related note disclosures.

Under GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. Financial reporting under this presumption is commonly referred to as the going concern basis of accounting. The going concern basis of accounting establishes the fundamental basis for measuring and classifying assets and liabilities.

Under ASU 2014-15, an entity would be required to evaluate its status as a going concern as part of its periodic financial statement preparation process and would be required to disclose information about its potential inability to continue as a going concern when “substantial doubt” about its ability to continue as a going concern for the period of one year from the earlier of the date its financial statements are issued or are ready to be issued.

If management concludes that there is “substantial doubt” about the entity’s ability to continue as a going concern, it must disclose the principal conditions or events causing substantial doubt to be raised, management’s evaluation of the conditions and management’s plans. If substantial doubt is not alleviated as a result of management’s plans, the company is required to include a statement that there is “substantial doubt about the entity’s ability to continue as a going concern.” ASU 2014-15 also requires an entity to disclose how the substantial doubt was resolved in the period that substantial doubt no longer exists.

ASU 2014-15 is effective for the annual period ending December 31, 2016. The adoption of ASU 2014-15 did not have an effect on the financial statements of the Company.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are Variable Interest Entities (“VIEs”) or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company adopted ASU 2015-02 effective January 1, 2016. The adoption of ASU 2015-02 had no effect on the Company’s consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 affects the accounting for equity investments, financial liabilities under the fair value option, the presentation and disclosure requirements for financial instruments, and the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities.

ASU 2016-01 requires that:

·

All equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) with readily determinable fair values will generally be measured at fair value through earnings.

·

When the fair value option has been elected for incentive fee purposes. Under the amended agreement, profitability is primarily based on net income for a rolling four-quarter period determinedfinancial liabilities, changes in compliance with U.S. GAAP. Previously, the agreement based profitability on U.S. GAAP net income generally excluding non-cashfair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. The accumulated gains and losses.

Management fees from the Investment Funds decreased $447,000 in the year ended December 31, 2014 compared to the year ended December 31, 2013. The decrease waslosses due to decreases inthese changes will be reclassified from accumulated other comprehensive income to earnings if the Investment Funds’ net asset values as a result of continued distributionsfinancial liability is settled before maturity.

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·

For financial instruments measured at amortized cost, public business entities will be required to use the Investment Funds’ investors following the end of the Investment Funds’ commitment periods at December 31, 2011, which reduced the investment base on which the management fees are computed.

Carried Interest from Investment Funds decreased $7.3 million in the year ended December 31, 2014 compared to the year ended December 31, 2013. Observed market demand for distressed loans, changes inexit price when measuring the fair value of financial instruments for disclosure purposes.

·

Financial assets and financial liabilities shall be presented separately in the notes to the financial statements, grouped by measurement category (e.g., fair value, amortized cost, lower of cost or fair value) and form of financial asset (e.g., loans, securities).

·

Public business entities will no longer be required to disclose the methods and significant assumptions used to estimate the fair value of financial instruments carried at amortized cost.

·

Entities will have to assess the realizability of a deferred tax asset related to a debt security classified as available for sale in combination with the entity’s other deferred tax assets.

The classification and measurement guidance will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption of the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income is permitted and can be elected for all financial statements of fiscal years and interim periods that have not yet been issued or that have not yet been made available for issuance. The Company does not expect the adoption of ASU 2016-01to have a significant effect on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”).  ASU 2016-02 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors) and supersedes previous leasing standards. ASU 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether the lease is effectively a financed purchase of the leased asset by the lessee. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. 

ASU 2016-02 is effective for the Company for reporting periods beginning after December 15, 2018, with early adoption permitted. As shown in Note 24 - Commitments and Contingencies, the Company had approximately $100.8 million in future minimum lease payment commitments as of December 31, 2016. Were the Company to adopt ASU 2016-02 as of December 31, 2016, it would be required to recognize a right-of-use asset and a corresponding liability based on the present value of such obligation as of December 31, 2016. The Company does not expect to recognize a significant cumulative effect adjustment to its stockholders’ equity as a result of adopting ASU 2016-02.

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation(Topic 718):  Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment award transactions, including:

·

Modifies the accounting for income taxes relating to share-based payments. All excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) will be recognized as income tax expense or benefit in the consolidated income statement. The tax effects of exercised or vested awards will be treated as discrete items in the reporting period in which they proceed throughoccur. An entity will recognize excess tax benefits regardless of whether the resolution processbenefit reduces taxes payable in the current period. Under current GAAP, excess tax benefits are recognized in additional paid-in capital; tax deficiencies are recognized either as an offset to accumulated excess tax benefits, if any, or in the consolidated income statement in the period they reduce income taxes payable.

·

Changes the classification of excess tax benefits on the consolidated statement of cash flows. In the consolidated statement of cash flows, excess tax benefits will be classified along with other income tax cash flows as an operating activity. Under current GAAP, excess tax benefits are separated from other income tax cash flows and continuing increasesclassified as a financing activity.

·

Changes the requirement to estimate the number of awards that are expected to vest. Under ASU 2016-09, an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest as presently required or account for forfeitures when they occur.

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Under current GAAP, accruals of compensation cost are based on the number of awards that are expected to vest.

·

Changes the tax withholding requirements for share-based payment awards to qualify for equity accounting. The threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in collateral valuationsthe applicable jurisdictions. Under current GAAP, for an award to qualify for equity classification is that an entity cannot partially settle the award in cash in excess of the employer’s minimum statutory withholding requirements.

·

Establishes GAAP for the properties underlyingclassification of employee taxes paid when an employer withholds shares for tax withholding purposes. Cash paid by an employer when directly withholding shares for tax- withholding purposes should be classified as a financing activity. This guidance establishes GAAP related to the Funds’classification of withholding taxes in the statement of cash flows as there is no such guidance under current GAAP.

ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any organization in any interim or annual period. The Company does not expect the adoption of ASU 2016-09 to have a significant effect on its stock-based compensation expense or on previously recognized paid-in capital relating to such expense.

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Results of Operations

Our results of operations are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

 

2016

    

2015

    

2014

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

Net gains on mortgage loans held for sale at fair value

 

$

531,780

 

$

320,715

 

$

167,024

 

Mortgage loan origination fees

 

 

125,534

 

 

91,520

 

 

41,576

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

86,465

 

 

58,607

 

 

48,719

 

Net mortgage loan servicing fees

 

 

185,466

 

 

229,543

 

 

216,919

 

Management fees & Carried Interest

 

 

23,726

 

 

30,865

 

 

48,664

 

Net interest expense

 

 

(25,079)

 

 

(19,382)

 

 

(9,486)

 

Other

 

 

3,995

 

 

1,242

 

 

4,861

 

Total net revenue

 

 

931,887

 

 

713,110

 

 

518,277

 

Expenses

 

 

548,804

 

 

433,917

 

 

295,244

 

Provision for income taxes

 

 

46,103

 

 

31,635

 

 

26,722

 

Net income

 

$

336,980

 

$

247,558

 

$

196,311

 

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes by segment:

 

 

 

 

 

 

 

 

 

 

Mortgage banking:

 

 

 

 

 

 

 

 

 

 

Production

 

$

416,096

 

$

271,869

 

$

135,619

 

Servicing

 

 

(36,099)

 

 

1,297

 

 

65,925

 

Total mortgage banking

 

 

379,997

 

 

273,166

 

 

201,544

 

Investment management

 

 

2,486

 

 

7,722

 

 

20,111

 

Non-segment activities (1)

 

 

600

 

 

(1,695)

 

 

1,378

 

 

 

$

383,083

 

$

279,193

 

$

223,033

 

During the period:

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments issued

 

$

52,648,017

 

$

39,432,317

 

$

19,589,704

 

Fair value of mortgage loans purchased and originated for sale:

 

 

 

 

 

 

 

 

 

 

Government-insured or guaranteed loans acquired from PennyMac Mortgage Investment Trust

 

$

42,051,505

 

$

31,490,920

 

$

16,431,338

 

Mortgage loans originated through consumer direct channel

 

 

6,491,107

 

 

4,143,239

 

 

1,952,505

 

 

 

$

48,542,612

 

$

35,634,159

 

$

18,383,843

 

Unpaid principal balance of mortgage loans fulfilled for PennyMac Mortgage Investment Trust

 

$

23,188,386

 

$

14,014,603

 

$

11,476,448

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance of mortgage loan servicing portfolio:

 

 

 

 

 

 

 

 

 

 

Owned:

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

$

129,177,106

 

$

110,602,704

 

$

64,690,613

 

Mortgage servicing liabilities

 

 

2,074,896

 

 

806,897

 

 

478,581

 

Mortgage loans held for sale

 

 

2,101,283

 

 

1,052,485

 

 

1,100,910

 

 

 

 

133,353,285

 

 

112,462,086

 

 

66,270,104

 

Subserviced for Advised Entities

 

 

60,886,717

 

 

47,810,632

 

 

39,709,945

 

 

 

$

194,240,002

 

$

160,272,718

 

$

105,980,049

 

Net assets of Advised Entities:

 

 

 

 

 

 

 

 

 

 

PennyMac Mortgage Investment Trust

 

$

1,351,114

 

$

1,496,113

 

$

1,578,172

 

Investment Funds

 

 

197,550

 

 

231,745

 

 

424,182

 

 

 

$

1,548,664

 

$

1,727,858

 

$

2,002,354

 


(1)

Primarily represents repricing of Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement.

Comparison of the years ended December 31, 2016, 2015 and 2014

During the year ended December 31, 2016, we recorded net income of $337.0 million, an increase of $89.4 million, or 36%, from 2015. Our net income in 2016 reflects net gains on mortgage loans held for sale at fair value of $531.8 million, an increase of $211.1 million, or 66%, from 2015 resulting from a 44% increase in our loan production. This growth was supplemented by an increase of $34.0 million, or 37%, in mortgage loan origination fees. These revenue increases were partially offset by a decrease of $44.1 million in net mortgage loan servicing fees, primarily reflecting an increase in amortization, impairment and change in fair value of MSRs due to low mortgage rates through

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most of the year leading to higher actual and expected prepayment activity in the future, and an increased risk premium for government servicing assets.

During the year ended December 31, 2015, we recorded net income of $247.6 million, an increase of $51.2 million or 26% from 2014. Our net income in 2015 reflects net gains on mortgage loans held for sale at fair value of $320.7 million, an increase of $153.7 million, or 92%, from 2014, reflecting a 94% increase in our loan production. This growth was supplemented by an increase of $49.9 million, or 120%, in mortgage loan origination fees. These revenue increases were partially offset by a decrease in management fees and Carried Interest of $17.8 million and increased expenses incurred to accommodate the growth of our mortgage banking segments.

Net gains on mortgage loans held for sale at fair value

During the year ended December 31, 2016, we recognized net gains on mortgage loans held for sale at fair value totaling $531.8 million, compared to $320.7 million and $167.0 million during the years ended December 31, 2015 and 2014, respectively.

The increases in net gains on mortgage loans held for sale at fair value in 2016 and 2015 were primarily due to growth in the volume of mortgage loans that we purchased or originated and subsequently sold. Our net gains on mortgage loans held for sale include both cash and non-cash elements. We receive proceeds on sale that include both cash and MSRs. The net gain for the years ended December 31, 2016, 2015 and 2014 included $562.5 million, $452.4 million and $207.9 million, respectively, in fair value of MSRs received as part of proceeds on sales, net of mortgage servicing liabilities incurred. We also recognize a liability for our estimate of the losses we expect to incur in the future as a result of claims against us in connection with the representations and warranties that we made in the loan sales transactions. The net gain for the years ended December 31, 2016, 2015 and 2014, included net (reversals) provisions for losses relating to representations and warranties of ($582,000), $7.5 million and $5.3 million, respectively.

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Our net gains on mortgage loans held for sale are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

 

2016

    

2015

    

2014

 

 

 

(in thousands)

 

From non affiliates:

 

 

 

 

 

 

 

 

 

 

Cash (loss) gain:

 

 

                       

 

 

                       

 

 

                       

 

Mortgage loans

 

$

(62,283)

 

$

(82,709)

 

$

43,665

 

Hedging activities

 

 

10,275

 

 

(47,150)

 

 

(90,507)

 

 

 

 

(52,008)

 

 

(129,859)

 

 

(46,842)

 

Non-cash gain:

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights and mortgage servicing liabilities resulting from mortgage loan sales, net

 

 

562,540

 

 

452,411

 

 

207,885

 

Provision for losses relating to representations and warranties:

 

 

 

 

 

 

 

 

 

 

Pursuant to mortgage loan sales

 

 

(7,090)

 

 

(7,512)

 

 

(5,291)

 

Reduction in liability due to change in estimate

 

 

7,672

 

 

 —

 

 

 —

 

Change in fair value of mortgage loans and derivative financial instruments outstanding at year end:

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

15,618

 

 

11,372

 

 

25,640

 

Mortgage loans

 

 

2,796

 

 

3,949

 

 

12,733

 

Hedging derivatives

 

 

10,344

 

 

(1,810)

 

 

(19,264)

 

 

 

 

539,872

 

 

328,551

 

 

174,861

 

From PennyMac Mortgage Investment Trust - Recapture payable

 

 

(8,092)

 

 

(7,836)

 

 

(7,837)

 

 

 

$

531,780

 

$

320,715

 

$

167,024

 

During the year:

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance of mortgage loans sold

 

$

47,410,115

 

$

35,111,710

 

$

17,928,780

 

Interest rate lock commitments issued:

 

 

 

 

 

 

 

 

 

 

Conventional mortgage loans

 

$

3,146,908

 

$

7,001,938

 

$

1,341,492

 

Government-insured or guaranteed mortgage loans

 

 

49,501,109

 

 

32,430,379

 

 

18,248,212

 

 

 

$

52,648,017

 

$

39,432,317

 

$

19,589,704

 

Year end:

 

 

 

 

 

 

 

 

 

 

Mortgage loans held for sale at fair value

 

$

2,172,815

 

$

1,101,204

 

$

1,147,884

 

Commitments to fund and purchase mortgage loans

 

$

4,279,611

 

$

3,487,366

 

$

1,765,597

 

Provision for Losses Under Representations and Warranties

We record our estimate of the losses that we expect to incur in the future as a result of claims against us made in connection with the representations and warranties provided to the purchasers and insurers of the mortgage loans we sold in our Net gains on sale of mortgage loans held for sale at fair value. Our agreements with the purchasers and insurers include representations and warranties related to the mortgage loans we sell to the purchasers. The representations and warranties require adherence to purchaser and insurer origination and underwriting guidelines, including but not limited to the validity of the lien securing the mortgage loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law.

In the event of a breach of our representations and warranties, we may be required to either repurchase the mortgage loans with the identified defects or indemnify the purchaser or insurer. In such cases, we bear any subsequent credit loss on the mortgage loans. Our credit loss may be reduced by any recourse we have to correspondent originators that sold such mortgage loans to us and breached similar or other representations and warranties. In such event, we have the right to seek a recovery of related repurchase losses from that correspondent seller.

The method used to estimate our losses on representations and warranties is a function of our estimate of future defaults, mortgage loan repurchase rates, the severity of loss in the event of defaults, if applicable, and the probability of reimbursement by the correspondent mortgage loan seller. We establish a liability at the time mortgage loans are sold and review our liability estimate on a periodic basis. 

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During the years ended December 31, 2016, 2015 and 2014, we recorded net provisions for (reversals of) losses under representations and warranties totaling ($582,000), $7.5 million and $5.3 million, respectively. The reversal recognized during 2016 was comprised of a provision for losses related to current year sales totaling $7.1 million offset by a $7.7 million reduction relating to mortgage loans sold in prior periods. We recorded this reversal due to our losses continuing to be realized at lower-than-anticipated levels due in part to the high rate of refinancing activity resulting from the historically low interest rates over recent years. The increase in 2015 over 2014 was primarily due to an increase in the volume of mortgage loan sales activity during 2015 as compared to 2014.

Following is a summary of mortgage loan repurchase activity and the unpaid balance of mortgage loans subject to representations and warranties:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

    

2016

    

2015

    

2014

 

 

 

(in thousands)

 

During the year:

 

 

                       

 

 

                       

 

 

                       

 

Indemnification activity

 

 

 

 

 

 

 

 

 

 

Mortgage loans indemnified by PFSI at beginning of period

 

$

3,470

 

$

1,521

 

$

80

 

New indemnifications

 

 

3,063

 

 

2,311

 

 

1,441

 

Less:

 

 

 

 

 

 

 

 

 

 

Indemnified mortgage loans repurchased

 

 

 —

 

 

 —

 

 

 —

 

Indemnified mortgage loans repaid or refinanced

 

 

934

 

 

362

 

 

 —

 

Mortgage loans indemnified by PFSI at end of period

 

$

5,599

 

$

3,470

 

$

1,521

 

Repurchase activity

 

 

 

 

 

 

 

 

 

 

Total mortgage loans repurchased by PFSI

 

$

19,248

 

$

21,723

 

$

2,742

 

Less:

 

 

 

 

 

 

 

 

 

 

Mortgage loans repurchased by correspondent lenders

 

 

12,625

 

 

17,538

 

 

2,451

 

Mortgage loans repaid by borrowers or resold with defects resolved

 

 

4,793

 

 

3,118

 

 

138

 

Net mortgage loans repurchased by PFSI with losses chargeable to liability for representations and warranties

 

$

1,830

 

$

1,067

 

$

153

 

Net losses charged to liability for representations and warranties

 

$

962

 

$

160

 

$

155

 

 

 

 

 

 

 

 

 

 

 

 

Year end:

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance of mortgage loans subject to representations and warranties

 

$

90,650,605

 

$

60,687,246

 

 

37,014,687

 

Liability for representations and warranties

 

$

19,067

 

$

20,611

 

 

13,259

 

During the year ended December 31, 2016, we repurchased mortgage loans with unpaid principal balances totaling $19.2 million and charged $962,000 in incurred losses relating to repurchases against our liability for representations and warranties. As the outstanding balance of mortgage loans we purchase and sell subject to representations and warranties increases and as previously sold mortgage loans outstanding continue to season, we expect the level of repurchase and loss activity to increase.

Other Mortgage Loan Production-Related Revenues

Loan origination fees increased $34.0 million during the year ended December 31, 2016 compared to the year ended December 31, 2015. The increase was primarily due to an increase in the volume of mortgage loans we produced.

During the year ended December 31, 2015, loan origination fees increased $49.9 million to $91.5 million. The increase was primarily due to an increase in the volume of mortgage loans we produced compounded by increases in certain fees we charge in our loan production activities.

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Fulfillment fees from PMT represent fees we collect for services we perform on behalf of PMT in connection with the acquisition, packaging and sale of mortgage loans. The fulfillment fees are calculated as a percentage of the UPB of the mortgage loans we fulfill for PMT. The fulfillment fees increased $27.9 million in 2016, compared to 2015, due to an increase in the volume of mortgage loans we fulfilled in 2016 compared to 2015, partially offset by reductions in fulfillment fee rates pursuant to an amendment to our mortgage banking services agreement with PMT and discretionary reductions in fees relating to mortgage loan sales prior to the date of the amendment to the agreement. Fulfillment fees increased $9.9 million in 2015, compared to 2014, due to increases in the volume of mortgage loans we fulfilled in 2015 as compared to 2014, partially offset by contractual discretionary reductions in fulfillment fees made to facilitate certain transactions.

Summarized below are our fulfillment fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

 

2016

    

2015

    

2014

 

 

 

(dollars in thousands)

 

Fulfillment fee revenue

 

$

86,465

 

$

58,607

 

$

48,719

 

Unpaid principal balance of mortgage loans fulfilled

 

$

23,188,386

 

$

14,014,603

 

$

11,476,448

 

Average fulfillment fee rate (in basis points)

 

 

37

 

 

42

 

 

42

 

Net mortgage loan servicing fees

Our net mortgage loan servicing fees are summarized below.

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

 

2016

    

2015

    

2014

 

 

 

(in thousands)

 

Net mortgage loan servicing fees:

 

 

 

 

 

 

 

 

 

 

Mortgage loan servicing fees:

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

$

385,633

 

$

290,474

 

$

173,005

 

From PennyMac Mortgage Investment Trust

 

 

50,615

 

 

46,423

 

 

52,522

 

From Investment Funds

 

 

2,583

 

 

2,636

 

 

6,425

 

Ancillary and other fees

 

 

46,910

 

 

43,139

 

 

26,469

 

 

 

 

485,741

 

 

382,672

 

 

258,421

 

Amortization, impairment and change in fair value of mortgage servicing rights and excess servicing spread financing

 

 

(300,275)

 

 

(153,129)

 

 

(41,502)

 

Net mortgage loan servicing fees

 

$

185,466

 

$

229,543

 

$

216,919

 

Average mortgage loan servicing portfolio

 

$

177,676,686

 

$

135,177,080

 

$

91,887,504

 

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Amortization, impairment and change in fair value of mortgage servicing rights and excess servicing spread are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

2016

    

2015

    

2014

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Amortization of mortgage servicing rights carried at lower of amortized cost or fair value and realization of cash flows of mortgage servicing rights carried at fair value

 

$

(204,608)

 

$

(134,790)

 

$

(68,996)

Other changes in fair value of mortgage servicing rights and mortgage servicing liabilities carried at fair value and provision for impairment of mortgage servicing rights carried at lower of amortized cost or fair value

 

 

(145,995)

 

 

(14,432)

 

 

(28,009)

Change in fair value of excess servicing spread

 

 

23,923

 

 

3,810

 

 

28,663

Hedging results

 

 

26,405

 

 

(7,717)

 

 

26,840

Total fair value adjustments, net of hedging results

 

 

(95,667)

 

 

(18,339)

 

 

27,494

Total amortization, impairment and change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread

 

$

(300,275)

 

$

(153,129)

 

$

(41,502)

Average mortgage servicing rights balances:

 

 

 

 

 

 

 

 

 

Carried at lower of amortized cost or fair value

 

$

839,289

 

$

553,395

 

$

321,049

Carried at fair value

 

 

557,595

 

 

527,134

 

 

277,313

 

 

$

1,396,884

 

$

1,080,529

 

$

598,362

Mortgage servicing rights at year end:

 

 

 

 

 

 

 

 

 

Carried at lower of amortized cost or fair value

 

$

1,111,747

 

$

751,688

 

$

405,445

Carried at fair value

 

 

515,925

 

 

660,247

 

 

325,383

 

 

$

1,627,672

 

$

1,411,935

 

$

730,828

Following is a summary of our mortgage loan servicing portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 

 

 

 

2016

    

2015

 

 

 

(unpaid principal balance-in thousands)

 

Mortgage loans serviced

 

 

 

 

 

 

 

Prime servicing:

 

 

 

 

 

 

 

Owned:

 

 

 

 

 

 

 

Mortgage servicing rights

 

 

 

 

 

 

 

Originated

 

$

89,516,155

 

$

59,880,349

 

Acquired

 

 

39,660,951

 

 

50,722,355

 

 

 

 

129,177,106

 

 

110,602,704

 

Mortgage servicing liabilities

 

 

2,074,896

 

 

806,897

 

Mortgage loans held for sale

 

 

2,101,283

 

 

1,052,485

 

 

 

 

133,353,285

 

 

112,462,086

 

Subserviced for Advised Entities

 

 

58,327,748

 

 

43,963,378

 

Total prime servicing

 

 

191,681,033

 

 

156,425,464

 

Special servicing–Subserviced for Advised Entities

 

 

2,558,969

 

 

3,847,254

 

Total mortgage loans serviced

 

$

194,240,002

 

$

160,272,718

 

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During the year ended December 31, 2016, net mortgage loan servicing fees decreased $44.1 million, or 19%, when compared to the year ended December 31, 2015. The decrease during the year was due to an increase of $147.1 million, or 96%, in MSR amortization and MSR, MSL and ESS valuation adjustments reflecting the effects of the historically low interest rate environment that prevailed during 2016 compounded by the growth in our investment in MSRs. The low interest rate environment encouraged borrower-refinancing activities, which negatively affected MSR fair values and the expected lives of the mortgage loans underlying such MSRs. Additionally, the risk premium demanded by market participants for government servicing assets increased during the year, which also negatively affected MSR fair values. The negative effect was partially offset by an increase of $103.1 million, or 27%, in mortgage loan servicing fee revenue due to an increase in our average MSR portfolio of $42.5 billion, or 31%, in 2016 compared to 2015. The increase in our average MSR portfolio reflects the growth in our mortgage loan production and sales.

During the year ended December 31, 2015, net mortgage loan servicing fees increased $12.6 million, or 6%, when compared to the year ended December 31, 2014. The increase during the year was due to:

·

an increase of $117.5 million in mortgage loan servicing fees from non-affiliates resulting from growth in our portfolio of loans serviced due to purchases of MSRs supplemented with the ongoing sales of mortgage loans with servicing rights retained;

·

a decrease of $9.9 million in 2013 resultedmortgage loan servicing fees from our Advised Entities primarily due to nonrecurrence of certain activity-based fees;

·

an increase of $16.7 million in valuation gains. This was not repeated in the same magnitude and the Funds’ investment portfolios are substantially smaller in 2014 compared to 2013.

Other revenues

Net interest expense increased $8.4 million during the year ended December 31, 2014 compared to the year ended December 31, 2013ancillary fees due to growth in our investmentsthe portfolio of mortgage loans serviced; and

·

an increase of $111.6 million in non-interest earning assets — primarily MSRs which are financed in part with ESS sales.

The results of our holdings of common shares of PMT, which is included in Changesamortization, impairment and change in fair value of investmentmortgage servicing rights and excess servicing spread primarily due to increased amortization and negative changes in total fair value adjustments of MSRs and dividends received from PMT are summarized below:ESS, net of hedging results.

 

Management fees and Carried Interest

Management fees and Carried Interest are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

    

2016

    

2015

    

2014

 

 

(in thousands)

Management fees:

 

 

 

 

 

 

 

 

 

PennyMac Mortgage Investment Trust:

 

 

 

 

 

 

 

 

 

Base management

 

$

20,657

    

$

22,851

 

$

23,330

Performance incentive

 

 

 —

 

 

1,343

 

 

11,705

 

 

 

20,657

 

 

24,194

 

 

35,035

Investment Funds

 

 

2,089

 

 

4,043

 

 

7,473

Total management fees

 

 

22,746

 

 

28,237

 

 

42,508

Carried Interest

 

 

980

 

 

2,628

 

 

6,156

Total management fees and Carried Interest

 

$

23,726

 

$

30,865

 

$

48,664

 

 

 

 

 

 

 

 

 

 

Net assets of Advised Entities at year end:

 

 

 

 

 

 

 

 

 

PennyMac Mortgage Investment Trust

 

$

1,351,114

 

$

1,496,113

 

$

1,578,172

Investment Funds

 

 

197,550

 

 

231,745

 

 

424,182

 

 

$

1,548,664

 

$

1,727,858

 

$

2,002,354

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Management fees from PMT decreased by $3.5 million during the year ended December 31, 2016, compared to the year ended December 31, 2015, primarily reflecting the reduction in PMT’s shareholder’s equity upon which its management fees are based.

Management fees from PMT decreased $10.8 million during the year ended December 31, 2015 compared to the year ended December 31, 2014. The decrease was due primarily to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

    

2014

    

2013

    

2012

 

 

 

(in thousands)

 

Dividends

 

$

134 

 

$

216 

 

$

167 

 

Change in fair value

 

 

(140)

 

 

(175)

 

 

650 

 

 

 

$

(6)

 

$

41 

 

$

817 

 

Fair value of PennyMac Mortgage Investment Trust shares at year end

 

$

1,582 

 

$

1,722 

 

$

1,897 

 

Change·

a decrease in fair valuebase management fees of investment in and dividends received from PMT decreased $47,000 during the year ended December 31, 2014 when compared to the year ended December 31, 2013 primarily$0.5 million due to a decrease in the fair value of our investment in common shares of PMT. We held 75,000 common shares of PMT during each of the years ended December 31, 2014, 2013PMT’s shareholders’ equity upon which its base management fee is based; and 2012.

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Table

·

a decrease in performance incentive fees of Contents

Expenses

Our compensation expense is summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

    

2014

    

2013

    

2012

 

 

 

(in thousands)

 

Salaries and wages

 

$

118,428 

 

$

101,064 

 

$

61,300 

 

Incentive compensation

 

 

38,464 

 

 

24,929 

 

 

30,607 

 

Taxes and benefits

 

 

20,011 

 

 

16,125 

 

 

9,025 

 

Stock and unit-based compensation

 

 

13,804 

 

 

6,458 

 

 

23,082 

 

 

 

$

190,707 

 

$

148,576 

 

$

124,014 

 

 

 

 

 

 

 

 

 

 

 

 

Average headcount

 

 

1,581 

 

 

1,331 

 

 

732 

 

Year end headcount

 

 

1,816 

 

 

1,373 

 

 

1,028 

 

Compensation expense increased $42.1$10.4 million or 28%, during because of PMT’s reduced financial performance over the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase in compensation expense was primarily due to the development of and growth in our loan servicing segment.  Incentive compensation increased due to additions to staff made to facilitate increases in net income andfour-quarter period for which incentive compensation-eligible staff. The increase in compensation for the year ended December 31, 2014 as compared to the year ended December 31, 2013 includes increased stock-based compensation expense as a result of employee and director equity awards granted late in the second quarter of 2013, partially offset by $1.6fees were calculated.

Management fees from the Investment Funds decreased $2.0 million and $3.4 million of a cumulative expense reversal of certain performance condition RSU awards for the years ended December 31, 2016 and December 31, 2015, respectively, compared to the years ended December 31, 2015 and December 31, 2014. The reduction of management fees was anticipated and is due to the continued decrease in the Investment Funds’ net asset value as the Investment Funds continue their distributions from their liquidating portfolios following the end of the funds’ investment period on December 31, 2011.

Carried Interest income from the Investment Funds decreased $1.6 million and $3.5 million for the years ended December 31, 2016 and December 31, 2015 compared to the years ended December 31, 2015 and December 31, 2014, respectively. Appreciation returns have decreased due to changes in observed market demand for similar assets, to less than anticipated residual proceeds on liquidated assets and to a shrinking investment base on which returns are generated.

Other revenues

Net interest expense increased $5.7 million during the year ended December 31, 2016 compared to the year ended December 31, 2015 and $9.9 million during the year ended December 31, 2015 compared to the year ended December 31, 2014 due to growth in financing of our investments in non-interest earning assets — primarily MSRs which are financed in part with ESS sales.

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

 

2016

    

2015

    

2014

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Dividends received from PennyMac Mortgage Investment Trust

 

$

141

 

$

207

 

$

134

 

Change in fair value of investment in PennyMac Mortgage Investment Trust

 

 

83

 

 

(437)

 

 

(140)

 

Dividends received and change in fair value

 

$

224

 

$

(230)

 

$

(6)

 

Fair value of PennyMac Mortgage Investment Trust shares at year end

 

$

1,228

 

$

1,145

 

$

1,582

 

Change in fair value of investment in and dividends received from PMT increased $454,000 during the year ended December 31, 2016 compared to the year ended December 31, 2015 and decreased $224,000 during the year ended December 31, 2015 compared to the year ended December 31, 2014, primarily due to changes in the fair value of our investment in PMT. We held 75,000 common shares of PMT during each of the years ended December 31, 2016, 2015 and 2014.

 

Servicing expense increased $41.4 million in the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase was due to growth in our purchased mortgage servicing portfolio, which includes large purchases of seasoned government-insured guaranteed loans that are subject to nonreimbursable servicing advance losses, and the initiation of an early buyout (“EBO”) program to purchase defaulted loans out of legacy Ginnie Mae pools.

During the year ended December 31, 2014, we purchased $1.0 billion in UPB of EBOs, producing current period expense as accumulated non-reimbursable interest advances, net of interest receivable from the loans’ insurer or guarantor at the debenture rate of interest applicable to the respective loans, are charged to servicing expense when the loans are purchased from the Ginnie Mae pools.  The financial benefit of the EBO program is to reduce future servicing costs by purchasing and either selling the defaulted loans or otherwise financing them with debt at interest rates below the Ginnie Mae MBS pass-through rates rather than advancing principal and interest on such defaulted loans at the Ginnie Mae MBS pass-through rate until liquidation.

Technology expense increased $6.2 million in the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase was due to growth in loan servicing operations and continued investment in loan production and servicing infrastructure.

60

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Expenses

Compensation

Our compensation expense is summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

 

2016

    

2015

    

2014

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and wages

 

$

211,238

 

$

166,166

 

$

118,428

 

Incentive compensation

 

 

78,241

 

 

61,216

 

 

41,937

 

Taxes and benefits

 

 

36,169

 

 

29,359

 

 

20,011

 

Stock and unit-based compensation

 

 

16,505

 

 

17,521

 

 

10,331

 

 

 

$

342,153

 

$

274,262

 

$

190,707

 

Head count:

 

 

 

 

 

 

 

 

 

 

Average

 

 

2,745

 

 

2,239

 

 

1,581

 

Year end

 

 

3,038

 

 

2,509

 

 

1,816

 

Compensation expense increased $67.9 million, or 25%, during the year ended December 31, 2016 compared to the year ended December 31, 2015. The increase in compensation was in continuing support of the growth in our mortgage banking activities. Incentive compensation increased primarily due to an increase in production-related incentives, arising from growth in our mortgage loan production and, to a lesser extent, increased discretionary bonuses due to increased profitability in 2016 compared to 2015.

Compensation expense increased $83.6 million, or 44%, during the year ended December 31, 2015 compared to the year ended December 31, 2014. The increase in compensation expense was primarily due to the development of and growth in our mortgage banking segments.  Incentive compensation increased primarily due to additions to incentive compensation-eligible staff made to facilitate increases in net income. The increase in compensation for the year ended December 31, 2015 as compared to the year ended December 31, 2014 includes increased stock-based compensation expense as a result of employee and director equity awards granted late in the second quarter of 2014 and in 2015.

Servicing

Servicing expense increased $17.8 million and $19.7 million in the years ended December 31, 2016 and 2015 compared to the year ended December 31, 2015 and, 2014, respectively. The increases were due to growth in our government-insured or guaranteed mortgage servicing portfolio, which includes mortgage loans that are subject to nonreimbursable servicing advance losses, and to the EBO program to purchase defaulted mortgage loans out of seasoned Ginnie Mae pools. The EBO program reduces the ultimate cost of servicing such mortgage loan pools but accelerates loss recognition when the mortgage loans are purchased. 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.

During the year ended December 31, 2016, we purchased $1.6 billion in UPB of EBOs as compared to $883.6 million for the year ended December 31, 2015 and $592.7 million for the year ended December 31, 2014, producing current period expense as 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, are charged to servicing expense when the mortgage loans are purchased from the Ginnie Mae pools. 

Technology

Technology expense increased $10.2 million and $9.7 million in the years ended December 31, 2016 and 2015 compared to the years ended December 31, 2015 and 2014, respectively. The increase was primarily due to growth in loan servicing operations and continued investment in loan production and servicing infrastructure.

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Loan origination

Loan origination expenses increased $5.1million and $7.8 million during 2016 and 2015, as compared to the prior year, respectively. The increases in loan origination expenses during 2016 and 2015 were primarily due to growth in the volume of loan origination activities.

Professional services and other expenses

Professional service expenses increased $2.6 million and $4.4 million during 2016 and 2015, as compared to the prior year, respectively. Other expenses increased $11.3 million and $13.5 million during 2016 and 2015, as compared to the prior year, respectively. The increases reflect the Company’s growth during both years.

Expenses Allocated to PMT

 

PMT reimburses us for other expenses, including common overhead expenses incurred on its behalf by us, in accordance with the terms of our management agreement with PMT.  The expense amounts presented in our income statement are net of these allocations.  ExpenseCommon overhead expense amounts allocated to PMT during the years ended December 31, 2014, 20132016, 2015 and 20122014 are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

Year ended December 31,

 

    

2016

    

2015

    

2014

 

    

2014

    

2013

    

2012

 

 

(in thousands)

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Technology

 

$

4,346 

 

$

3,876 

 

$

1,158 

 

 

$

3,136

 

$

4,629

 

$

4,346

 

Occupancy

 

 

2,149 

 

 

2,174 

 

 

1,374 

 

 

 

2,033

 

 

2,034

 

 

2,149

 

Depreciation and amortization

 

 

2,066 

 

 

1,393 

 

 

590 

 

 

 

1,350

 

 

2,051

 

 

2,066

 

Other

 

 

1,916 

 

 

2,980 

 

 

1,067 

 

 

 

1,379

 

 

2,028

 

 

1,916

 

Total expenses

 

$

10,477 

 

$

10,423 

 

$

4,189 

 

 

$

7,898

 

$

10,742

 

$

10,477

 

The amount of total expenses that we allocated to PMT during the year ended December 31, 2014 remained generally consistent compared to the year ended December 31, 2013. The amount of total expenses that we allocated to PMT during the year ended December 31, 2013 increased $6.2 million from $4.2 million in the year ended December 31, 2012 due to growth in our overhead expenses as well as growth in PMT’s balance sheet, resulting in an increase in the proportion of our overhead expenses being allocated to PMT.

 

Provision for Income Taxes

 

For the years ended December 31, 20142016, 2015 and 2013,2014, our effective tax rates were 12.0%, 11.3% and 5.5%12.0%, respectively. The difference between our effective tax rate and the statutory rate is primarily due to the allocation of earnings to the noncontrolling interest unitholders. As the noncontrolling interest unitholders convert their ownership units into our shares, we expect an increase in allocated earnings that will be subject to corporate federal and state statutory tax rates, which will in turn increase our effective income tax rate.

 

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Balance Sheet Analysis

 

Following is a summary of key balance sheet items as of the dates presented:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 

 

 

December 31,

 

 

2016

    

2015

 

    

2014

    

2013

 

 

(in thousands)

 

 

 

(in thousands)

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and short-term investments

 

$

97,943 

 

$

173,221 

 

 

$

185,331

 

$

151,791

 

Mortgage loans held for sale at fair value

 

 

1,147,884 

 

 

531,004 

 

 

2,172,815

 

1,101,204

 

Servicing advances, net

 

 

228,630 

 

 

154,328 

 

 

348,306

 

299,354

 

Receivable from affiliates

 

 

26,162 

 

 

21,551 

 

Investments in and advances to affiliates

 

168,863

 

171,426

 

Carried Interest due from Investment Funds

 

 

67,298 

 

 

61,142 

 

 

70,906

 

69,926

 

Mortgage servicing rights

 

 

730,828 

 

 

483,664 

 

 

1,627,672

 

1,411,935

 

Other assets

 

 

208,380 

 

 

159,565 

 

Mortgage loans eligible for repurchase

 

382,268

 

166,070

 

Other

 

 

177,741

 

 

133,588

 

Total assets

 

$

2,507,125 

 

$

1,584,475 

 

 

$

5,133,902

 

$

3,505,294

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings

 

$

1,113,114 

 

$

523,746 

 

 

$

2,580,906

 

$

1,476,318

 

Payable to affiliates

 

 

350,389 

 

 

256,834 

 

 

555,052

 

679,548

 

Other liabilities

 

 

236,356 

 

 

174,691 

 

Liability for mortgage loans eligible for repurchase

 

382,268

 

166,070

 

Other

 

 

216,320

 

 

121,008

 

Total liabilities

 

 

1,699,859 

 

 

955,271 

 

 

 

3,734,546

 

2,442,944

 

Total stockholders' equity

 

 

807,266 

 

 

629,204 

 

Stockholders' equity

 

 

1,399,356

 

 

1,062,350

 

Total liabilities and stockholders' equity

 

$

2,507,125 

 

$

1,584,475 

 

 

$

5,133,902

 

$

3,505,294

 

 

Total assets increased $922.7 million$1.6 billion from $1.6$3.5 billion at December 31, 20132015 to $2.5$5.1 billion at December 31, 2014.2016. The increase was primarily due to an increase of $616.9 million$1.1 billion in mortgage loans held for sale at fair value, primarily related to the initiation of the EBO program resultingan increase in mortgage loan purchasesloans eligible for repurchase of $1.0 billion$216.2 million arising from the growth and seasoning of our portfolio of MSRs backed by government guaranteed and insured mortgage loans and an increase of $247.2$215.7 million inof MSRs, resulting from growth in our mortgage banking operations and purchases of MSRs, partially offset by a decreaseloan production in short-term investments of $120.9 million as we deployed cash and proceeds from issuance of ESS2016 compared to fund balance sheet growth.2015.

 

Total liabilities increased by $744.6 million$1.3 billion from $955.3 million as of December 31, 2013 to $1.7$2.4 billion as of December 31, 2014.2015 to $3.7 billion as of December 31, 2016. The increase was primarily attributable to an increase in mortgage loansassets sold under agreements to repurchase of $351.0$568.4 million, an increase of $436.6 million in mortgage loan participation and sale agreements, an increase in liability for mortgage loans eligible for repurchase of $216.2 million and an increase of $89.8 million in sales of mortgage loan participation certificates of $143.6 million, allnotes payable, primarily to fund growth in our inventory of mortgage loans held for sale at fair value, an increase in note payable of $94.7 million, and an increase in liabilities relating to the sale of ESS to PMT of $52.4 million.MSRs.

 

Cash Flows

 

Our cash flows resulted in a net increase in cash of $45.6 million duringfor the yearthree years ended December 31, 2014. The increase was due to cash provided by our investing and financing activities exceeding cash used in our operating activities.2016 are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Year ended December 31,

 

 

 

2016

    

2015

    

2014

 

 

 

(in thousands)

 

Operating

 

$

(938,522)

 

$

53,144

 

$

(578,954)

 

Investing

 

 

(34,739)

 

 

(563,142)

 

 

6,752

 

Financing

 

 

967,156

 

 

539,214

 

 

617,819

 

Net (decrease) increase in cash

 

$

(6,105)

 

$

29,216

 

$

45,617

 

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Operating activities

 

Cash used in(used in) provided by operating activities totaled $579.0($938.5) million, $98.4$53.1 million and $308.1($579.0) million during the years ended December 31, 2016, 2015, and 2014 2013 and 2012, respectively,respectively. The increase in cash used in operating activities during 2016 as compared to 2015 is primarily due to the growth of our inventory ofan increase in mortgage loans held for sale at December 31, 2016 as compared to December 31, 2015. The increase in cash provided by operating activities in 2015 as compared to 2014 is primarily due to a result of the EBO program and our loan production exceedingdecrease in mortgage loan sales.loans held for sale at December 31, 2015 as compared to December 31, 2014.

 

Investing activities

 

Net cash used in investing activities was $34.7 million during 2016, a reduction from $563.1 million in 2015 due to large purchases of MSRs and advances made to PMT under a note receivable during 2015 that did not recur during 2016. Net cash provided by investing activities was $6.8 million during the year ended December 31, 2014. The net cash provided by investing activities was primarily a result of thea decrease in short termshort-term investments.

Financing activities

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Net cash used in investingprovided by financing activities was $284.8 million and $45.5$967.2 million during the yearsyear ended December 31, 20132016, primarily from net proceeds from sales of assets under agreements to repurchase of $569.5 million, net proceeds from issuances of mortgage loan participation certificates of $436.7 million and 2012,net proceeds from advances on notes payable of $89.3 million to finance growth in our inventory of mortgage loans held for sale and investments in MSRs. The increases were partially offset by repayments of ESS totaling $129.0 million.

Net cash provided by financing activities was $539.2 million during the year ended December 31, 2015, primarily due to an increasenet financing proceeds of $260.0 million related to new and existing debt facilities and net proceeds of ESS activity of $193.0 million. Cash provided by financing activities also includes net proceeds of $91.3 million received from two mortgage loan participation and sale agreements used to finance the growth in our short-term investmentsinventory of mortgage loans held for sale and proceeds of $13.6 million related to the financing of certain fixed assets structured under a financing lease.  These net cash usedinflows were offset by $18.9 million of cash outflows related to purchase MSRs. The cash used in the increase in our short-term investments in 2013 reflects the liquidity provideddebt issuance costs and distributions made by the IPO.

Financing activitiesPennyMac to its members.

 

Net cash provided by financing activities was $617.8 million during the year ended December 31, 2014, primarily due to an increase in loans sold under agreements to repurchase and a mortgage loan participation agreement used to finance the growth in our inventory of mortgage loans held for sale. Cash provided by financing activities also reflects the proceeds received from sales of ESS of $95.9 million in 2014 and increased financing related to growth in our government MSRs.

 

Net cash provided by financing activities was $401.5 million during the year ended December 31, 2013, primarily due to the IPO, which raised $212.8 million net of underwriting and offering costs. Cash provided by financing activities also reflects the proceeds received from sales of ESS of $139.0 million in 2013.

Net cash provided by financing activities was $349.5 million during the year ended December 31, 2012, primarily due to an increase in loans sold under agreements to repurchase used to finance the growth in our inventory of mortgage loans held for sale.

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)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 additional equity or debt offerings. We believe that our liquidity is sufficient to meet our current liquidity needs.

 

Our current leverage 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 mortgage loansassets under agreements to repurchase, sales of mortgage loan participation certificates, ESS financing, notes payable (including a revolving credit agreement) and a note payable secured by MSRs and loan servicing advances.capital lease.  All of our borrowings other than ESS and our obligation under capital lease have short-term maturities and provide for terms of approximately one year. We will continue to finance most of our assets on a short-term basis until long-term financing becomes more available. Because a significant portion of our current debt facilities consists of short-

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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 mortgage loansassets together with agreements for us to buy back the mortgage loansassets at a later date. During, 2014,The table below presents the average balance outstanding, under agreements to repurchase mortgage loans totaled $529.8 million, and the maximum daily amount outstanding under such agreements totaled $1.1 billion. During 2013, the average balance outstanding under agreements to repurchase mortgage loans totaled $344.6 million, and the maximum daily amount outstanding under such agreements totaled $623.5 million. During 2012, the average balance outstanding under agreements to repurchase mortgage loans totaled $172.7 million, and the maximum daily amount outstanding under such agreements totaled $441.2 million. The difference between the maximum and average daily amounts outstanding is due to variations in levels of production, loan inventoriesending balances for years ended December 31, 2016, 2015 and EBOs during the year and timing of receipt of cash from loan sales.2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

    

    

2016

    

2015

 

2014

 

 

 

 

(in thousands)

 

Repurchase agreements outstanding:

 

 

 

 

 

 

 

 

 

 

 

Average balance

 

 

$

1,438,181

 

$

823,490

 

$

529,832

 

Maximum daily balance

 

 

$

2,661,746

 

$

1,976,744

 

$

1,073,073

 

Balance at year end

 

 

$

1,736,922

 

$

1,167,405

 

$

822,252

 

PLS’s debt

Our secured financing agreements at PLS require itus 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 $20 million;

·

a minimum tangible net worth of $200 million;

·

a maximum ratio of total liabilities to tangible net worth of 10:1; and

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·

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 debtsecured 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 and carried interest 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.

 

With respect to servicing performed for PMT, PLS is also subject to certain covenants under its debt agreements. Covenants in PMT’s debt agreements are equally, or sometimes less, restrictive than the covenants described above.

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

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margin deficit. A margin deficit will generally result from any decline in the market value (as determined by the applicable lender) of the assets subject to the related financing agreement. Upon notice from the applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice.

 

We are also subject to liquidity and net worth requirements established by FHFA for Agency seller/servicers and Ginnie Mae for single-family issuers. FHFA and Ginnie Mae have established minimum liquidity requirements and revised their net worth requirements for their approved non-depository single-family sellers/servicers in the case of Fannie Mae, Freddie Mac, and Ginnie Mae for its approved single-family issuers, as summarized below:

·

FHFA liquidity requirement is equal to 0.035% (3.5 basis points) of total Agency servicing UPB plus an incremental 200 basis points of the amount by which total nonperforming Agency servicing UPB exceeds 6% of the applicable Agency servicing UPB; allowable assets to satisfy liquidity requirement include cash and cash equivalents (unrestricted), certain investment-grade securities that are available for sale or held for trading including Agency mortgage-backed securities, obligations of Fannie Mae or Freddie Mac, and U.S. Treasury obligations, and unused and available portions of committed servicing advance lines;

·

FHFA net worth requirement is a minimum net worth of $2.5 million plus 25 basis points of UPB for total 1-4 unit residential mortgage loans serviced and a tangible net worth/total assets ratio greater than or equal to 6%;

·

Ginnie Mae single-family issuer minimum liquidity requirement is equal to the greater of $1.0 million or 0.10% (10 basis points) of the issuer’s outstanding Ginnie Mae single-family securities, which must be met with cash and cash equivalents; and

·

Ginnie Mae net worth requirement is equal to $2.5 million plus 0.35% (35 basis points) of the issuer’s outstanding Ginnie Mae single-family obligations.

We believe that we are currently in compliance with the applicable Agency requirements.

We have purchased portfolios of MSRs and have financed them in part through the sale to PMT of the right to receive ESS. The repaymentoutstanding amount of the ESS financing is based on the current valuation of such ESS and amounts received on the underlying mortgage loans.

 

We continue to explore a variety of means of financing our continued growth, including debt financing through bank warehouse lines of credit, financing MSR purchases through bank lines of credit, additionalloans, 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, 2014,2016, we have not entered into any off-balance sheet arrangements or guarantees.

 

Contractual Obligations

 

As of December 31, 2014,2016, we had on-balance sheet contractual obligations aggregating $7.5 billion, comprised of $822.6 millionborrowings, commitments to finance assetspurchase and originate mortgage loans, a payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under agreementstax receivable agreement, and anticipated payments related to repurchase and $143.6 million to finance assets under our mortgage loan participation and sale agreement. We also had a contractual obligation of $146.9 million relating to a note payable secured by MSRs.excess servicing spread financing. We also lease our primary office facilities under an agreement that expires on February 28, 2017agreements and we license certain software to support our loan servicing operations.

 

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All agreements to repurchase assets and the mortgage loan participation and sale agreementagreements that matured between December 31, 20142016 and the date of this Report have been renewed, extended or repaid and are described in Note 16—15—Borrowings in the accompanying consolidated financial statements.

 

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Payment obligations under these agreements are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments due by period

 

 

Payments due by period

 

 

 

 

Less than

 

1-3

 

3-5

 

More than

 

 

 

 

Less than

 

1-3

 

3-5

 

More than

 

Contractual obligations

    

Total

    

1 year

    

years

    

years

    

5 years

 

    

Total

    

1 year

    

years

    

years

    

5 years

  

 

(in thousands)

 

 

(in thousands)

 

Mortgage loans sold under agreements to repurchase

 

$

822,621 

 

$

822,621 

 

$

 —

 

$

 —

 

$

 —

 

Mortgage loan participation and sale agreement

 

 

143,638 

 

 

143,638 

 

 

 —

 

 

 —

 

 

 —

 

Note payable

 

 

146,855 

 

 

146,855 

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments to purchase and originate mortgage loans

 

$

4,279,611

 

$

4,279,611

 

$

 —

 

$

 —

 

$

 —

 

Assets sold under agreements to repurchase

 

1,736,922

 

 

1,736,922

 

 

 —

 

 

 —

 

 

 —

 

Mortgage loan participation and sale agreements

 

671,562

 

 

671,562

 

 

 —

 

 

 —

 

 

 —

 

Notes payable

 

151,935

 

 

151,935

 

 

 —

 

 

 —

 

 

 —

 

Obligations under capital lease

 

23,424

 

 

10,176

 

 

13,248

 

 

 —

 

 

 —

 

Excess servicing spread financing at fair value payable to PennyMac Mortgage Investment Trust (1)

 

 

191,166 

 

 

 —

 

 

 —

 

 

 —

 

 

191,166 

 

 

288,669

 

 

 —

 

 

 —

 

 

 —

 

 

288,669

 

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

 

75,954

 

 

7,746

 

 

11,931

 

 

10,013

 

 

46,264

 

Anticipated interest payments related to excess servicing spread financing at fair value

 

115,256

 

 

17,211

 

 

27,941

 

 

21,038

 

 

49,066

 

Software licenses (2)

 

 

16,920 

 

 

8,460 

 

 

8,460 

 

 

 —

 

 

 —

 

 

41,437

 

 

14,625

 

 

26,812

 

 

 —

 

 

 —

 

Office leases

 

 

17,776 

 

 

5,069 

 

 

7,106 

 

 

3,014 

 

 

2,587 

 

 

 

100,786

 

 

9,516

 

 

25,929

 

 

24,189

 

 

41,152

 

Total

 

$

1,338,976 

 

$

1,126,643 

 

$

15,566 

 

$

3,014 

 

$

193,753 

 

 

$

7,485,556

 

$

6,899,304

 

$

105,861

 

$

55,240

 

$

425,151

 


(1)

The ESS financing obligation payable to PMT does not have a stated contractual maturity date and will pay down as the underlying MSRs receive the excess servicing fee rate due to PMT.

(2)

Software licenses include both volume and activity‑based fees that are dependent on the number of loans serviced during each period and include a base fee of approximately $490,000$1.2 million per year.month. Estimated payments for such software licenses above are based on the number of loans currently serviced by us, which totaled approximately 513,000 1.0 million at December 31, 2014.2016. Future amounts due may significantly fluctuate based on changes in the number of loans serviced by us. For the year ended December 31, 2014,2016, software license fees totaled $15.9 $32.0 million. All figures contained in this footnote are in actual amounts and not in thousands (in contrast to the table above).

 

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, 2014:

2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average

 

 

 

 

 

 

 

 

maturity of 

 

 

 

 

 

 

 

 

advances under 

 

 

 

Counterparty

    

Amount at risk

    

repurchase agreement

   

Facility Maturity

 

 

 

(in thousands)

 

 

 

 

 

Credit Suisse First Boston Mortgage Capital LLC

 

$

89,508 36,579

 

June 12, 2015March 4, 2017

 

OctoberMarch 30, 20152017

Credit Suisse First Boston Mortgage Capital LLC

$

1,072,322

December 19, 2017

December 19, 2017

 

Bank of America, N.A.

 

$

54,534 26,932

 

January 21, 2015March 19, 2017

 

January 30, 2015March 28, 2017

 

Morgan Stanley Bank, N.A.

 

$

10,489 11,741

 

February 18, 20152017

 

June 29, 2015August 25, 2017

JP Morgan Chase Bank, N.A.

$

8,076

March 20, 2017

August 18, 2017

 

Citibank, N.A.

 

$

31 5,338

 

January 22, 201528, 2017

February 2, 2017

Barclays Bank PLC

$

2,351

March 17, 2017

December 1, 2017

Royal Bank of Canada

$

 —

 

September 7, 201518, 2017

 

 

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Debt Obligations

 

As described further above in “Liquidity and Capital Resources,” we currently finance certain of our assets through borrowings with major financial institution counterparties in the form of sales of mortgage loansassets under agreements to repurchase, a mortgage loan participation and sale agreementagreements, notes payable (including a revolving credit agreement) and a note payable secured by MSRs and loan servicing advances.capital lease. The borrower under each of these facilities is PLS with two exceptions where the borrower is PennyMac: the revolving credit agreement, which is classified as a note payable and allthe capital lease.  All PLS obligations thereunderas previously noted are guaranteed by Private National Mortgage Acceptance Company, LLC.

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, 2014, we were in compliance in all material respects with these covenants.

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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.PennyMac.

 

All of PLS’sour non-ESS financing borrowings discussed above have short-term maturities that expire as follows as of December 31, 2014:

follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

Facility

 

 

 

 

Outstanding

 

Total

 

Committed

 

 

 

Counterparty (1)

    

Indebtedness (2)

    

Amount

    

Maturity Date (3)

 

Lender

    

indebtedness (1)

    

facility size (2)

    

facility (2)

    

Maturity date (2)

 

 

(in thousands)

 

 

 

 

(dollar amounts in thousands)

 

                                        

 

Assets sold under agreements to repurchase

 

 

 

 

 

 

 

 

 

 

Credit Suisse First Boston Mortgage Capital LLC

 

$

553,988

 

$

820,000

 

$

707,000

 

March 30, 2017

 

Credit Suisse First Boston Mortgage Capital LLC(3)

 

$

407,000

 

$

407,000

 

$

 —

 

December 19, 2017

 

Bank of America, N.A.

 

$

236,771 

 

$

225,000 

 

January 30, 2015

 

 

$

342,769

 

$

500,000

 

$

225,000

 

March 28, 2017

 

Morgan Stanley Bank, N.A.

 

$

188,851

 

$

300,000

 

$

175,000

 

August 25, 2017

 

JP Morgan Chase Bank, N.A.

 

$

135,322

 

$

200,000

 

$

50,000

 

August 18, 2017

 

Citibank, N.A.

 

$

80,525

 

$

400,000

 

$

200,000

 

March 2, 2018

 

Barclays Bank PLC (4)

 

$

28,467

 

$

220,000

 

$

 —

 

December 1, 2017

 

Royal Bank of Canada

 

$

 —

 

$

135,000

 

$

75,000

 

September 18, 2017

 

Mortgage loan participation and sale agreements

 

 

 

 

 

 

 

 

 

 

JP Morgan Chase Bank, N.A.

 

$

475,476

 

 

500,000

 

$

 —

 

October 31, 2017

 

Bank of America, N.A.

 

$

143,638 

 

$

150,000 

 

January 30, 2015

 

 

$

196,086

 

$

250,000

 

$

 —

 

March 28, 2017

 

Credit Suisse First Boston Mortgage Capital LLC(3)

 

$

463,541 

 

$

500,000 

 

October 30, 2015

 

Credit Suisse First Boston Mortgage Capital LLC

 

$

146,855 

 

$

257,000 

 

October 30, 2015

 

Morgan Stanley

 

$

122,031 

 

$

125,000 

 

June 29, 2015

 

Citibank, N.A.

 

$

278 

 

$

50,000 

 

September 7, 2015

 

Notes payable

 

 

 

 

 

 

 

 

 

 

Barclays Bank PLC (4)

 

$

76,935

 

$

80,000

 

$

80,000

 

December 1, 2017

 

Credit Suisse AG

 

$

75,000

 

$

150,000

 

$

150,000

 

November 17, 2017

 

Obligations under capital lease

 

 

 

 

 

 

 

 

 

 

Banc of America Leasing and Capital LLC

 

$

23,424

 

$

25,000

 

$

 —

 

November 3, 2019

 


(1)

The borrowings with BankOutstanding indebtedness as of America, N.A. (with a committed amount of $225 million), Credit Suisse First Boston Mortgage Capital LLC (with a committed amount of $500 million), Morgan Stanley and Citibank, N.A. are in the form of sales of mortgage loans under agreements to repurchase. The borrowing with Bank of America, N.A. (with a committed amount of $150 million) is in the form of a mortgage loan participation and sale agreement. The borrowing with Credit Suisse First Boston Mortgage Capital LLC (with a committed amount of $257 million) is in the form of a note payable secured by certain MSRs and loan servicing advances.December 31, 2016.

(2)

Represents outstanding indebtedness reduced by cash collateral asTotal facility size, committed facility and maturity date include contractual changes through the date of December 31, 2014.this Report.

(3)

All agreements that matured between December 31, 2014 and the dateThe borrowing of this Report have been renewed, extended or repaid and are described in Note 16—Borrowings$407 million with Credit Suisse First Boston Mortgage Capital LLC is in the accompanying consolidated financial statements.form of sales of a variable funding note under an agreement to repurchase.

(4)

The borrowings with Barclays Bank PLC are subject to a total aggregate facility amount of $300 million, of which $80 million represents the maximum amount for MSRs.

Item 7A.  QuantitativeQuantitative 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 credit risk, interest rate risk, prepayment risk, inflationcredit risk and marketfair 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

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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 reduce the variability of income caused by changes in interest rates. To manage this price risk resulting from interest rate risk, we use derivative financial instruments acquired with the intention of moderating the risk that changes in market interest rates will result in unfavorable changes in the fair value of our IRLCs, inventory of mortgage loans held for sale and MSRs. We do not use derivative financial instruments other than IRLCs for purposes other than in support of our risk management activities.

Prepayment Risk

To the extent that the actual prepayment rate on the mortgage loans underlying our MSRs differs from what we projected when we initially recognized the MSRs, MSLs, and ESS financing and when we measured fair value as of the end of each reporting period, the carrying value of our investment in MSRs will be affected. In general, a decrease in the principal balances of the mortgage loans underlying our MSRs or an increase in prepayment expectations will accelerate the amortization and may result in impairments of our MSRs accounted for using the amortization method and decrease our estimates of the fair value of both the MSRs accounted for using the amortization method and those accounted for using the fair value method, 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.

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 because of thatdue 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 recoursethe 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

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review our loss experience relating to representations and warranties and adjust our liability estimate when necessary. We believe that residual loan credit quality is primarily determined by the borrowers’ credit profiles and loan characteristics.

 

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 purchaseproduce 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.

 

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 interest rate lock agreements and inventory of mortgage loans held for sale.

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 reduce the variability of income caused by changes in interest rates. 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 value of our interest rate lock commitments and inventory of mortgage loans held for sale. We do not use derivative financial instruments for purposes other than in support of our risk management activities.

Prepayment Risk

To the extent that the actual prepayment rate on the mortgage loans underlying our MSRs differs from what we projected when we initially recognized the MSRs 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 decline in the principal balances of the loans underlying our MSRs or an increase in prepayment expectations will accelerate the amortization and may result in impairments of our MSRs accounted for using the amortization method and decrease our estimates of the fair value of both the MSRs accounted for using the amortization method and those accounted for using the fair value method, thereby reducing net servicing income.

Inflation Risk

A substantial portion of our assets and liabilities is interest rate sensitive in nature. As a result, interest rates and other factors will influence our performance more than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Furthermore, our consolidated financial statements are prepared in accordance with GAAP and any distributions that PennyMac may make to its members will be determined by us as the managing member of PennyMac based primarily on our taxable income and, in each case, our activities and balance sheet are measured with reference to historical cost and/or fair value without considering inflation.

MarketFair Value Risk

 

Our IRLCs, mortgage loans held for sale, a portion of 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.

 

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Table of Contents

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.

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Table of Contents

 

Mortgage Servicing Rights

 

The following tables summarize the estimated change in fair value of MSRs accounted for using the amortization method as of December 31, 2014,2016, 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

 

$

1,211,649

 

$

1,159,896

 

$

1,135,609

 

$

1,089,920

 

$

1,068,413

 

$

1,027,837

 

Change in fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

$

99,348

 

$

47,595

 

$

23,307

 

$

(22,382)

 

$

(43,889)

 

$

(84,464)

 

%

 

 

8.9

%  

 

4.3

%  

 

2.1

%  

 

(2.0)

%  

 

(4.0)

%  

 

(7.6)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pricing spread shift in %

    

-20%

    

-10%

    

-5%

    

+5%

    

+10%

    

+20%

 

Prepayment speed shift in %

    

-20%

    

-10%

    

-5%

    

+5%

    

+10%

    

+20%

 

 

(dollar amounts in thousands)

 

 

(dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

454,636 

 

$

434,528 

 

$

425,085 

 

$

407,310 

 

$

398,937 

 

$

383,129 

 

 

$

1,184,620

 

$

1,147,246

 

$

1,129,485

 

$

1,095,666

 

$

1,079,551

 

$

1,048,789

 

Change in fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

$

38,616 

 

$

18,508 

 

$

9,066 

 

$

(8,710)

 

$

(17,083)

 

$

(32,890)

 

 

$

72,318

 

$

34,944

 

$

17,184

 

$

(16,636)

 

$

(32,750)

 

$

(63,513)

 

%

 

 

9.28 

%

 

4.45 

%

 

2.18 

%

 

(2.09)

%

 

(4.11)

%

 

(7.91)

%

 

 

6.5

%  

 

3.1

%  

 

1.5

%  

 

(1.5)

%  

 

(2.9)

%  

 

(5.7)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepayment speed shift in %

    

-20%

    

-10%

    

-5%

    

+5%

    

+10%

    

+20%

 

 

 

(dollar amounts in thousands)

 

Fair value

 

$

447,896 

 

$

431,448 

 

$

423,612 

 

$

408,661 

 

$

401,526 

 

$

387,887 

 

Change in fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

$

31,877 

 

$

15,428 

 

$

7,592 

 

$

(7,359)

 

$

(14,494)

 

$

(28,132)

 

%

 

 

7.66 

%

 

3.71 

%

 

1.82 

%

 

(1.77)

%

 

(3.48)

%

 

(6.76)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per-loan servicing cost shift in %

    

-20%

    

-10%

    

-5%

    

+5%

    

+10%

    

+20%

 

    

-20%

    

-10%

    

-5%

    

+5%

    

+10%

    

+20%

 

 

(dollar amounts in thousands)

 

 

(dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

427,987 

 

$

422,003 

 

$

419,012 

 

$

413,028 

 

$

410,036 

 

$

404,053 

 

 

$

1,147,864

 

$

1,130,083

 

$

1,121,192

 

$

1,103,411

 

$

1,094,521

 

$

1,076,740

 

Change in fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

$

11,967 

 

$

5,983 

 

$

2,992 

 

$

(2,992)

 

$

(5,983)

 

$

(11,967)

 

 

$

35,562

 

$

17,781

 

$

8,890

 

$

(8,890)

 

$

(17,781)

 

$

(35,562)

 

%

 

 

2.88 

%

 

1.44 

%

 

0.72 

 

 

(0.72)

%

 

(1.44)

%

 

(2.88)

%

 

 

3.2

%  

 

1.6

%  

 

0.8

%  

 

(0.8)

%  

 

(1.6)

%  

 

(3.2)

%

 

The following tables summarize the estimated change in fair value of MSRs accounted for using the fair value method as of December 31, 2014,2016, 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

 

$

555,897

 

$

535,156

 

$

525,361

 

$

506,828

 

$

498,053

 

$

481,408

 

Change in fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

$

39,972

 

$

19,231

 

$

9,437

 

$

(9,097)

 

$

(17,872)

 

$

(34,516)

 

%

 

 

7.8

%  

 

3.7

%  

 

1.8

%  

 

(1.8)

%  

 

(3.5)

%  

 

(6.7)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pricing spread shift in %

    

-20%

    

-10%

    

-5%

    

+5%

    

+10%

    

+20%

 

Prepayment speed shift in %

    

-20%

    

-10%

    

-5%

    

+5%

    

+10%

    

+20%

 

    

(dollar amounts in thousands)

 

 

(dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

346,972 

 

$

334,347 

 

$

328,379 

 

$

317,076 

 

$

311,718 

 

$

301,542 

 

 

$

554,535

 

$

534,525

 

$

525,058

 

$

507,107

 

$

498,588

 

$

482,392

 

Change in fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

$

24,346 

 

$

11,720 

 

$

5,753 

 

$

(5,550)

 

$

(10,908)

 

$

(21,084)

 

 

$

38,610

 

$

18,601

 

$

9,134

 

$

(8,818)

 

$

(17,336)

 

$

(33,533)

 

%

 

 

7.55 

%

 

3.63 

%

 

1.78 

%

 

(1.72)

%

 

(3.38)

%

 

(6.54)

%

 

 

7.5

%  

 

3.6

%  

 

1.8

%  

 

(1.7)

%  

 

(3.4)

%  

 

(6.5)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepayment speed shift in %

    

-20%

    

-10%

    

-5%

    

+5%

    

+10%

    

+20%

 

 

    

(dollar amounts in thousands)

 

Fair value

 

$

353,886 

 

$

337,606 

 

$

329,964 

 

$

315,574 

 

$

308,792 

 

$

295,972 

 

Change in fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

$

31,259 

 

$

14,980 

 

$

7,338 

 

$

(7,052)

 

$

(13,835)

 

$

(26,654)

 

%

 

 

9.69 

%

 

4.64 

%

 

2.27 

%

 

(2.19)

%

 

(4.29)

%

 

(8.26)

%

6874


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per-loan servicing cost shift in %

    

-20%

    

-10%

    

-5%

    

+5%

    

+10%

    

+20%

 

    

-20%

    

-10%

    

-5%

    

+5%

    

+10%

    

+20%

 

 

(dollar amounts in thousands)

 

 

(dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

334,265 

 

$

328,446 

 

$

325,536 

 

$

319,717 

 

$

316,807 

 

$

310,988 

 

 

$

538,375

 

$

527,150

 

$

521,537

 

$

510,312

 

$

504,700

 

$

493,475

 

Change in fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

$

11,638 

 

$

5,819 

 

$

2,910 

 

$

(2,910)

 

$

(5,819)

 

$

(11,638)

 

 

$

22,450

 

$

11,225

 

$

5,612

 

$

(5,612)

 

$

(11,225)

 

$

(22,450)

 

%

 

 

3.61 

%

 

1.80 

%

 

0.90 

%

 

(0.90)

%

 

(1.80)

%

 

(3.61)

%

 

 

4.4

%  

 

2.2

%  

 

1.1

%  

 

(1.1)

%  

 

(2.2)

%  

 

(4.4)

%

 

Excess Servicing Spread Financing

 

The following tables summarize the estimated change in fair value of our excess servicing spread financing accounted for using the fair value method as of December 31, 2014,2016, given several shifts in pricing spreadsspread and prepayment speed (decrease in the liabilities’ values increases net income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pricing spread shift in %

    

-20%

    

-10%

    

-5%

    

+5%

    

+10%

    

+20%

 

 

 

(dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

300,198

 

$

294,323

 

$

291,469

 

$

285,921

 

$

283,224

 

$

277,978

 

Change in fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

$

11,529

 

$

5,654

 

$

2,800

 

$

(2,748)

 

$

(5,445)

 

$

(10,691)

 

%

 

 

4.0

%  

 

2.0

%  

 

1.0

%  

 

(1.0)

%  

 

(1.9)

%  

 

(3.7)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pricing spread shift in %

    

-20%

    

-10%

    

-5%

    

+5%

    

+10%

    

+20%

 

 

 

(dollar amounts in thousands)

 

Fair value

 

$

198,969 

 

$

194,211 

 

$

191,916 

 

$

187,485 

 

$

185,346 

 

$

181,211 

 

Change in fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

$

9,295 

 

$

4,536 

 

$

2,241 

 

$

(2,189)

 

$

(4,329)

 

$

(8,464)

 

%

 

 

4.90 

%

 

2.39 

%

 

1.18 

%

 

(1.15)

%

 

(2.28)

%

 

(4.46)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepayment speed shift in %

    

-20%

    

-10%

    

-5%

    

+5%

    

+10%

    

+20%

    

    

-20%

    

-10%

    

-5%

    

+5%

    

+10%

    

+20%

    

 

(dollar amounts in thousands)

 

 

(dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

209,184 

 

$

199,011 

 

$

194,245 

 

$

185,289 

 

$

181,078 

 

$

173,140 

 

 

$

317,099

 

$

302,270

 

$

295,325

 

$

282,283

 

$

276,153

 

$

264,601

 

Change in fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

$

19,509 

 

$

9,337 

 

$

4,570 

 

$

(4,385)

 

$

(8,597)

 

$

(16,535)

 

 

$

28,430

 

$

13,602

 

$

6,657

 

$

(6,386)

 

$

(12,516)

 

$

(24,067)

 

%

 

 

10.29 

%

 

4.92 

%

 

2.41 

%

 

(2.31)

%

 

(4.53)

%

 

(8.72)

%

 

 

9.9

%  

 

4.7

%  

 

2.3

%  

 

(2.2)

%  

 

(4.3)

%  

 

(8.3)

%

 

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.  ChangesChanges in and Disagreements Withwith Accountants on Accounting and Financial Disclosure

 

None.

Item 9A.  ControlsControls and Procedures

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. However, no matter how well a control system is designed and operated, it can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports.

 

Our management has conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by

75


Table of Contents

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

69


Table of Contents

effective, as of the end of the period covered by this Report, to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Internal Control over Financial Reporting

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of its internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on those criteria, management concluded that our internal control over financial reporting was effective as of December 31, 2014.2016.

 

This Report does not includeThe effectiveness of our  internal control over financial reporting as of December 31, 2016 has been audited  by Deloitte & Touche LLP, an attestation report of ourindependent registered public accounting firm, regardingas stated in their report which  appears herein.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

PennyMac Financial Services, Inc.

3043 Townsgate Rd

Westlake Village, CA 91361

We have audited the internal control over financial reporting.reporting of PennyMac Financial Services, Inc. and subsidiaries (“the Company”) as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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 reportReport 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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel 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 the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to attestationthe risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control—Integrated Framework (2013) issued by our registered public accounting firm pursuant to the rulesCommittee of Sponsoring Organizations of the SEC that permit us to provide only management’sTreadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2016 of the Company and our report in this Report.dated March 9, 2017 expressed an unqualified opinion on those financial statements.

 

/s/ DELOITTE & TOUCHE LLP

Los Angeles, California

March 9, 2017

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Changes in Internal Control over Financial Reporting

 

There has been no change in our internal control over financial reporting during the year ended December 31, 2014,2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.  Other Information

None.

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PART III

 

Item 10.  Directors, Executive Officers and Corporate Governance

 

The information required by this Item 10 is hereby incorporated by reference from our definitive proxy statement, or will be contained in an amendment to this Report, in either case to be filed by April 30, 2015,May 1, 2017, which is within 120 days after the end of fiscal year 2014.2016.

Item 11.  Executive Compensation

 

The information required by this Item 11 is hereby incorporated by reference from our definitive proxy statement, or will be contained in an amendment to this Report, in either case to be filed by April 30, 2015,May 1, 2017, which is within 120 days after the end of fiscal year 2014.2016.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The information required by this Item 12 is hereby incorporated by reference from our definitive proxy statement, or will be contained in an amendment to this Report, in either case to be filed by April 30, 2015,May 1, 2017, which is within 120 days after the end of fiscal year 2014.2016.

Item 13.  Certain Relationships and Related Transactions, and Director Independence

 

The information required by this Item 13 is hereby incorporated by reference from our definitive proxy statement, or will be contained in an amendment to this Report, in either case to be filed by April 30, 2015,May 1, 2017, which is within 120 days after the end of fiscal year 2014.2016.

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 by April 30, 2015,May 1, 2017, which is within 120 days after the end of fiscal year 2014.2016.

 

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PART IV

Item 15.  ExhibitsExhibits and Financial Statement Schedules

 

Exhibit
Number

    

Exhibit Description

3.1

 

Amended and Restated Certificate of Incorporation of PennyMac Financial Services, Inc. (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).

 

 

 

3.2

 

Amended and Restated Bylaws of PennyMac Financial Services, Inc. (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on August 19, 2013).

 

 

 

4.1

 

Specimen Class A Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the Registrant’s Amendment No. 4 to Form S-1 Registration Statement as filed with the SEC on April 29, 2013).

 

 

 

10.1

 

Fourth Amended and Restated Limited Liability Company Agreement of Private National Mortgage Acceptance Company, LLC, dated as of May 8, 2013 (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).

 

 

 

10.2

 

Exchange Agreement, dated as of May 8, 2013, between PennyMac Financial Services, Inc. and Private National Mortgage Acceptance Company, LLC and the Company Unitholders (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).

 

 

 

10.3

 

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 (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).

 

 

 

10.4

 

Registration Rights Agreement, dated as of May 8, 2013, between PennyMac Financial Services, Inc. and the Holders (incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).

 

 

 

10.5

 

Stockholder Agreement, dated as of May 8, 2013, between PennyMac Financial Services, Inc. and BlackRock Mortgage Ventures, LLC (incorporated by reference to Exhibit 10.5 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).

 

 

 

10.6

 

Stockholder Agreement, dated as of May 8, 2013, between PennyMac Financial Services, Inc. and HC Partners LLC (incorporated by reference to Exhibit 10.6 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).

 

 

 

10.7†

 

PennyMac Financial Services, Inc. 2013 Equity Incentive Plan (incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 14, 2013).

 

 

 

10.8†

 

PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Award Agreement for Non-Employee Directors (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 16, 2013).

 

 

 

10.9†

 

PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Award Agreement for Executive Officers (incorporated by reference to Exhibit 10.210.9 of the Registrant’s CurrentQuarterly Report on Form 8-K as filed with10-Q for the SEC on June 17, 2013)quarter ended September 30, 2015).

 

 

 

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10.10†

 

PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Award Agreement for Other Eligible Participants (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K as filed with the SEC on June 17, 2013).

10.11†

PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Award Agreement for Other Eligible Participants (2014) (incorporated by reference to Exhibit 10.1110.10 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014)2015).

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Exhibit
Number

Exhibit Description

 

 

 

10.12†10.11†

 

PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Stock Option Award Agreement (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on June 17, 2013).

 

 

 

10.13†10.12†

 

Form of PennyMac Financial Services, Inc. Indemnification Agreement (incorporated by reference to Exhibit 10.8 of the Registrant’s Amendment No. 2 to Form S-1 Registration Statement as filed with the SEC on April 5, 2013).

 

 

 

10.14†10.13†

 

Employment Agreement, dated as of April 20, 2013, by andDecember 8, 2015, among Stanford L. Kurland, Private National Mortgage Acceptance Company, LLC and PennyMac Financial Services, Inc. and Stanford L. Kurland (incorporated by reference to Exhibit 10.34 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013). 

10.15†

Employment Agreement, dated as of April 20, 2013, by and among Private National Mortgage Acceptance Company, LLC, PennyMac Financial Services, Inc. and David A. Spector (incorporated by reference to Exhibit 10.35 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).

10.16

Mortgage Banking and Warehouse Services Agreement, effective as of February 1, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.9 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

10.17

Amendment No. 1 to Mortgage Banking and Warehouse Services Agreement, dated as of March 1, 2013, by and between PennyMac Loan Services LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.31 of the Registrant’s Amendment No. 1 to Form S-1 Registration Statement as filed with the SEC on March 26, 2013).

10.18

Amendment No. 2 to Mortgage Banking and Warehouse Services Agreement, dated as of August 14, 2013, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 1.110.5 of the Registrant’s Current Report on Form 8-K as filed with the SEC on August 19, 2013)December 14, 2015).

 

 

 

10.1910.14†

 

Second Amended and Restated Flow ServicingEmployment Agreement, dated as of March 1, 2013, by and between PennyMac Operating Partnership, L.P.December 8, 2015, among David A. Spector, Private National Mortgage Acceptance Company, LLC and PennyMac LoanFinancial Services, LLCInc. (incorporated by reference to Exhibit 10.3010.6 of the Registrant’s Amendment No. 1 toCurrent Report on Form S-1 Registration Statement8-K as filed with the SEC on March 26, 2013)December 14, 2015).

 

 

 

10.2010.15

 

Amendment No. 1 to Second Amended and Restated Flow ServicingManagement Agreement, dated as of November 14, 2013,September 12, 2016, by and betweenamong PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PennyMac Loan Services,PNMAC Capital Management, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on November 20, 2013)September 12, 2016).

 

 

 

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10.2110.16

 

Amendment No. 2 to SecondThird Amended and Restated Flow Servicing Agreement, dated as of June 1, 2014,September 12, 2016, by and between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.2110.2 of the Registrant’s QuarterlyCurrent Report on Form 10-Q for8-K as filed with the quarter ended June 30, 2014)SEC on September 12, 2016).

 

 

 

10.2210.17

 

Amendment No. 3 to Second Amended and Restated Flow ServicingMortgage Banking Services Agreement, dated as of December 11, 2014, by and between PennyMac Operating Partnership, L.P. and PennyMac Loan Services, LLC.

10.23

MSR Recapture Agreement, effective as of February 1, 2013,September 12, 2016, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.1110.3 of the Registrant’s Current Report on Form S-1 Registration Statement8-K as filed with the SEC on February 7, 2013).September 12, 2016)

 

 

 

10.2410.18

 

Amendment No. 1 toAmended and Restated MSR Recapture Agreement, dated as of August 1, 2013,September 12, 2016, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.2110.4 of the Registrant’s Current Report on Form S-1 Registration Statement8-K as filed with the SEC on October 1, 2013).September 12, 2016)

 

 

 

10.25

Amended and Restated Management Agreement, dated as of February 1, 2013, by and among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 10.12 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

10.2610.19

 

Amended and Restated Underwriting Fee Reimbursement Agreement, dated as of February 1, 2013, by and among PennyMac Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 10.13 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

 

 

 

10.2710.20

 

Master Spread Acquisition and MSR Servicing Agreement, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P., dated as of February 1, 2013 (incorporated by reference to Exhibit 10.26 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

10.28

Amendment No. 1 to Master Spread Acquisition and MSR Servicing Agreement, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P., dated as of September 30, 2013 (incorporated by reference to Exhibit 10.25 of the Registrant’s Form S-1/A Registration Statement as filed with the SEC on October 23, 2013).

10.29

Amendment No. 2 to Master Spread Acquisition and MSR Servicing Agreement, dated as of November 14, 2013, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.27 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).

10.30

Amendment No. 3 to Master Spread Acquisition and MSR Servicing Agreement, dated as of March 19, 2014, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P. (incorporated by reference to Exhibit 10.28 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).

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10.31

Master Spread Acquisition and MSR Servicing Agreement, by and between PennyMac Loan Services, LLC and PennyMac Holdings, LLC dated as of December 30, 2013 (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K/A as filed with the SEC on March 21, 2014).

10.32

Amendment No. 1 to Master Spread Acquisition and MSR Servicing Agreement, dated as of June 1, 2014, by and between PennyMac Loan Services, LLC and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.31 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).

10.33

Master Spread Acquisition and MSR Servicing Agreement, dated as of December 19, 2014, among PennyMac Loan Services, LLC, PennyMac Operating Partnership, L.P., and PennyMac Holdings, LLC (incorporated(incorporated by reference to Exhibit 1.01 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 24, 2014).

 

 

 

10.3410.21

 

AmendedAmendment No. 1 to Master Spread Acquisition and Restated ConfidentialityMSR Servicing Agreement, dated as of March 1, 2013, by3, 2015, among PennyMac Loan Services, LLC, PennyMac Operating Partnership, L.P., and between PennyMac Mortgage Investment Trust and Private National Mortgage Acceptance Company,Holdings, LLC (incorporated by reference to Exhibit 10.2910.38 of the Registrant’s Amendment No. 1Quarterly Report on Form 10-Q for the quarter ended March 31, 2015).

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Exhibit
Number

Exhibit Description

10.22

Second Amended and Restated Master Spread Acquisition and MSR Servicing Agreement, dated as of December 19, 2016, by and between PennyMac Loan Services, LLC, and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.7 of the Registrant’s Current Report on Form S-1 Registration Statement8-K as filed with the SEC on March 26, 2013)December 21, 2016).

 

 

 

10.35

Amended and Restated Flow Servicing Agreement, by and between PNMAC Mortgage Co., LLC and PennyMac Loan Services, LLC, dated August 1, 2010 (incorporated by reference to Exhibit 10.14 of the Registrant’s Amendment No. 1 to Form S-1 Registration Statement as filed with the SEC on March 26, 2013).

10.3610.23

 

Second Amended and Restated Flow Servicing Agreement, dated as of August 1, 2008, as amended effective as of January 1, 2012, by and between PNMAC Mortgage Opportunity Fund Investors, LLC and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.15 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

 

 

 

10.3710.24

Amendment No. 1 to the Second Amended and Restated Flow Servicing Agreement, dated as of December 5, 2014, by and among PennyMac Loan Services, LLC and PNMAC Mortgage Opportunity Fund Investors, LLC (incorporated by reference to Exhibit 10.43 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015).

10.25

Amended and Restated Flow Servicing Agreement, by and between PNMAC Mortgage Co., LLC and PennyMac Loan Services, LLC, dated August 1, 2010 (incorporated by reference to Exhibit 10.14 of the Registrant’s Amendment No. 1 to Form S-1 Registration Statement as filed with the SEC on March 26, 2013).

10.26

Amendment No. 1 to the Amended and Restated Flow Servicing Agreement, dated as of December 4, 2014, by and among PennyMac Loan Services, LLC and PNMAC Mortgage Co., LLC (incorporated by reference to Exhibit 10.41 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015).

10.27

 

Amended and Restated Flow Servicing Agreement, dated as of August 1, 2010, by and between PNMAC Mortgage Opportunity Fund, LP and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.27 of the Registrant’s Amendment No. 1 to Form S-1 Registration Statement as filed with the SEC on March 26, 2013).

 

 

 

10.3810.28

Amendment No. 1 to the Amended and Restated Flow Servicing Agreement, dated as of December 4, 2014, by and among PennyMac Loan Services, LLC and PNMAC Mortgage Opportunity Fund, L.P. (incorporated by reference to Exhibit 10.45 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015).

10.29

Investment Management Agreement, dated as of August 1, 2008, between PNMAC Mortgage Opportunity Fund Investors, LLC and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 10.17 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

10.30

 

Investment Management Agreement, as amended and restated May 26, 2011, by and between PNMAC Mortgage Opportunity Fund, L.P. and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 10.16 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

 

 

 

10.39

Investment Management Agreement, dated as of August 1, 2008, between PNMAC Mortgage Opportunity Fund Investors, LLC and PNMAC Capital Management, LLC (incorporated by reference to Exhibit 10.17 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

10.4010.31

 

Master Repurchase Agreement, dated as of March 17, 2011, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.18 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

 

 

 

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10.4110.32

 

Amendment No. 1 to Master Repurchase Agreement, dated as of July 21, 2011, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibits 10.19 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).

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Exhibit
Number

Exhibit Description

 

 

 

10.4210.33

 

Amendment No. 2 to Master Repurchase Agreement, dated as of March 23, 2012, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibits 10.19 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).

 

 

 

10.4310.34

 

Amendment No. 3 to Master Repurchase Agreement, dated as of August 28, 2012, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibits 10.19 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).

 

 

 

10.4410.35

 

Amendment No. 4 to Master Repurchase Agreement, dated as of January 3, 2013, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibits 10.19 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).

 

 

 

10.4510.36

 

Amendment No. 5 to Master Repurchase Agreement, dated as of March 28, 2013, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibits 10.19 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).

 

 

 

10.4610.37

 

Amendment No. 6 to Master Repurchase Agreement, dated as of January 31, 2014, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on February 6, 2014).

 

 

 

10.4710.38

 

Amendment No. 7 to Master Repurchase Agreement, dated as of March 27, 2014, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.44 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).

 

 

 

10.4810.39

 

Amendment No. 8 to Master Repurchase Agreement, dated as of August 13, 2014, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.48 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014).

 

 

 

10.4910.40

 

Amendment No. 9 to Master Repurchase Agreement, dated as of January 30, 2015, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.LLC (incorporated by reference to Exhibit 10.49 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014).

 

 

 

10.5010.41

Amendment No. 10 to Master Repurchase Agreement, dated as of March 29, 2016, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.62 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016).

10.42

 

Guaranty, dated as of March 17, 2011, by Private National Mortgage Acceptance Company, LLC in favor of Bank of America, N.A.N.A (incorporated by reference to Exhibit 10.50 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014).

 

 

 

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10.51Exhibit
Number

Exhibit Description

10.43

 

Master Repurchase Agreement, dated as of June 26, 2012, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.20 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

 

 

 

10.5210.44

 

Amendment Number One to the Master Repurchase Agreement, dated as of December 31, 2012, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.21 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on February 7, 2013).

 

 

 

10.5310.45

 

Amendment Number Two to the Master Repurchase Agreement, dated April 17, 2013, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.40 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on October 1, 2013).

 

 

 

10.5410.46

 

Amendment Number Three to the Master Repurchase Agreement, dated June 25, 2013, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.41 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on October 1, 2013).

 

 

 

10.5510.47

 

Amendment Number Four to the Master Repurchase Agreement, dated July 25, 2013, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.42 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on October 1, 2013).

 

 

 

10.5610.48

 

Amendment Number Five to the Master Repurchase Agreement, dated February 5, 2014, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.50 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).

 

 

 

10.5710.49

 

Amendment Number Six to the Master Repurchase Agreement, dated February 25, 2014, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.51 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).

 

 

 

10.5810.50

 

Amendment Number Seven to the Master Repurchase Agreement, dated July 24, 2014, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.54 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).

 

 

 

10.5910.51

 

Amendment Number Eight to the Master Repurchase Agreement, dated August 7, 2014, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.55 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).

 

 

 

10.6010.52

 

Amendment Number Nine to the Master Repurchase Agreement, dated September 8, 2014, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.58 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014).

 

 

 

10.53

Amendment Number Ten to the Master Repurchase Agreement, dated July 6, 2015, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.69 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015).

10.54

Amendment Number Eleven to the Master Repurchase Agreement, dated August 3, 2015, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on August 5, 2015).

10.55

Amendment Number Twelve to the Master Repurchase Agreement, dated September 7, 2015, by and between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.72 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015).

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Exhibit
Number

Exhibit Description

10.56

Amendment Number Thirteen to the Master Repurchase Agreement, dated October 22, 2015, between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on October 28, 2015).

10.57

Amendment Number Fourteen to the Master Repurchase Agreement, dated July 25, 2016, between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.70 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016).

10.58

Amendment Number Fifteen to the Master Repurchase Agreement, dated September 26, 2016, between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on September 30, 2016).

10.59

Amendment Number Sixteen to the Master Repurchase Agreement, dated October 14, 2016, between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on October 20, 2016)

10.60

Amendment Number Seventeen to the Master Repurchase Agreement, dated October 20, 2016, between PennyMac Loan Services, LLC and Citibank, N.A. (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on October 20, 2016)

10.61

Amendment Number Eighteen to the Master Repurchase Agreement, dated December 2, 2016, between PennyMac Loan Services, LLC and Citibank, N.A.

10.62

Amendment Number Nineteen to the Master Repurchase Agreement, dated February 2, 2017, between PennyMac Loan Services, LLC and Citibank, N.A.

10.63

 

Guaranty Agreement, dated as of June 26, 2012, by Private National Mortgage Acceptance Company, LLC in favor of Citibank, N.A.N.A (incorporated by reference to Exhibit 10.61 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014).

 

 

 

10.6210.64

 

Second Amended and Restated Master Spread Participation Agreement, dated as of November 10, 2015, by and among PennyMac Loan Services, LLC and PennyMac Loan Services, LLC as the Initial Participant (incorporated by reference to Exhibit 10.189 of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015).

10.65

Loan and Security Agreement, dated as of April 30, 2015, among PennyMac Loan Services, LLC and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 6, 2015).

10.66

Amendment No. 1 to Loan and Security Agreement, dated as of October 30, 2015, by and between PennyMac Loan Services, LLC and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.87 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015).

10.67

Amendment No. 2 to Loan and Security Agreement, dated as of November 10, 2015, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC, and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.92 of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015).

10.68

Amendment No. 3 to Loan and Security Agreement, dated as of December 15, 2015, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC, and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.93 of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015).

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Exhibit
Number

Exhibit Description

10.69

Amendment No. 4 to Loan and Security Agreement, dated as of January 28, 2016, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC, and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.94 of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015).

10.70

Amendment No. 5 to Loan and Security Agreement, dated as of March 27, 2012,31, 2016, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC, and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.96 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016).

10.71

Amendment No. 6 to Loan and Security Agreement, dated as of September 26, 2016, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC, and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.71 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 31, 2016).

10.72

Third Amended and Restated Guaranty (Participation Certificates and Servicing), dated as of November 10, 2015, by Private National Mortgage Acceptance Company, LLC in favor of Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on November 16, 2015).

10.73

Master Repurchase Agreement (Participation Certificates and Servicing), dated as of November 10, 2015, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.2210.1 of the Registrant’s Current Report on Form S-1 Registration Statement as8-K filed with the SEC on February 7, 2013).

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Table of Contents

10.63

Amendment No. 1 to Second Amended and Restated Loan Security Agreement, dated as of December 12, 2012, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.23 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013)November 16, 2015).

 

 

 

10.6410.74

 

Amendment No. 21 to Second Amended and Restated Loan SecurityMaster Repurchase Agreement, dated as of March 22, 2013,December 19, 2016, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.23 of the Registrant’s Amendment No. 3 to Form S-1 Registration Statement as filed with the SEC on April 22, 2013).

10.65

Amendment No. 3 to Second Amended and Restated Loan Security Agreement, dated as of December 30, 2013, among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on January 3, 2014).

10.66

Amendment No. 4 to Second Amended and Restated Loan Security Agreement, dated as of October 31, 2014 among Credit Suisse First Boston Mortgage Capital LLC,AG, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.

 

 

 

10.6710.75

 

Amended and Restated Guaranty, dated as of March 27, 2012, by Private National Mortgage Acceptance Company, LLC in favor of Credit Suisse AG, New York Branch.

10.68

Amended and Restated Master Repurchase Agreement, dated as of May 3, 2013, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.36 of the Registrant’s Amendment No. 5 to Form S-1 Registration Statement as filed with the SEC on May 7, 2013).

10.69

Amendment No. 1 to Amended and Restated Master Repurchase Agreement, dated as of September 5, 2013, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.47 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on October 1, 2013).

10.70

Amendment No. 2 to Amended and Restated Master Repurchase Agreement, dated as of January 10, 2014, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.58 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).

10.71

Amendment No. 3 toSecond Amended and Restated Master Repurchase Agreement, dated as of March 13, 2014, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.59 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).

10.72

Amendment No. 4 to Amended and Restated Master Repurchase Agreement, dated as of April 30, 2014,2016, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on May 5, 2014).

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10.73

Amendment No. 5 to Amended and Restated Master Repurchase Agreement, dated as of May 22, 2014, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.65 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).

10.74

Amendment No.April 6, to Amended and Restated Master Repurchase Agreement, dated as of June 3, 2014, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.66 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014)2016).

10.75

Amendment No. 7 to Amended and Restated Master Repurchase Agreement, dated as of October 31, 2014, by and among Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.

 

 

 

10.76

 

Amendment No. 81 to Second Amended and Restated Master Repurchase Agreement, dated as of December 23, 2014,September 9, 2016, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.

 

 

 

10.77

 

Amendment No. 2 to Second Amended and Restated Master Repurchase Agreement, dated as of December 19, 2016, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.

10.78

Guaranty, dated as of August 14, 2009, by Private National Mortgage Acceptance Company, LLC in favor of Credit Suisse First Boston Mortgage Capital LLC.LLC (incorporated by reference to Exhibit 10.77 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014).

 

 

 

10.7810.79

 

Master Repurchase Agreement, dated as of July 2, 2013, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 1.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on July 8, 2013).

 

 

 

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10.79Exhibit
Number

Exhibit Description

10.80

 

Amendment Number One to the Master Repurchase Agreement, dated as of August 26, 2013, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 10.49 of the Registrant’s Form S-1 Registration Statement as filed with the SEC on October 1, 2013).

 

 

 

10.8010.81

 

Amendment Number Two to the Master Repurchase Agreement, dated as of January 28, 2014, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 10.63 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014).

 

 

 

10.8110.82

 

Amendment Number Three to the Master Repurchase Agreement, dated as of June 30, 2014, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 10.70 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).

 

 

 

10.8210.83

Amendment Number Four to the Master Repurchase Agreement, dated as of June 29, 2015, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 10.98 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015).

10.84

Amendment Number Five to the Master Repurchase Agreement, dated as of July 27, 2015, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on July 27, 2015).

10.85

Amendment Number Six to the Master Repurchase Agreement, dated as of November 9, 2015, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 10.118 of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015).

10.86

Amendment Number Seven to the Master Repurchase Agreement, dated July 26, 2016, by and between PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 10.91 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016).

10.87

Amendment Number Eight to the Master Repurchase Agreement, dated August 26, 2016, by and between PennyMac Loan Services, LLC,  Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC (incorporated by reference to Exhibit 10.84 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 31, 2016).

10.88

 

Guaranty Agreement, dated as of July 2, 2013, by Private National Mortgage Acceptance Company, LLC in favor of Morgan Stanley Bank, N.A. (incorporated by reference to Exhibit 1.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on July 8, 2013).

 

 

 

10.8310.89

 

Mortgage Loan Participation Purchase and Sale Agreement, dated as of August 13, 2014, by and among PennyMac Loan Services, LLC, Private National Mortgage Acceptance Company, LLC and Bank of America, N.A. (incorporated by reference to Exhibit 10.72 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).

 

 

 

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10.8410.90

 

Amendment No. 1 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of January 30, 2015, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.LLC (incorporated by reference to Exhibit 10.84 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014).

 

 

 

10.8510.91

Amendment No. 2 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 22, 2015, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.122 of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015).

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Exhibit
Number

Exhibit Description

10.92

Amendment No. 3 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of March 29, 2016, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.96 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016).

10.93

 

Amended and Restated Guaranty, dated as of August 13, 2014, by Private National Mortgage Acceptance Company, LLC in favor of Bank of America, N.A. (incorporated by reference to Exhibit 10.73 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014).

 

 

 

10.94

Mortgage Loan Purchase Agreement, dated as of September 25, 2012, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.124 of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015).

10.95

Flow Sale Agreement, dated as of June 16, 2015, by and between PennyMac Corp. and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.104 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015).

10.96

Amended and Restated Flow Commercial Mortgage Loan Purchase Agreement, dated as of June 1, 2016, by and between PennyMac Loan Services, LLC and PennyMac Corp. (incorporated by reference to Exhibit 10.100 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016).

10.97

Servicing Agreement, dated as of July 13, 2015, between PennyMac Corp., PennyMac Holdings, LLC, any other parties signing this Agreement as owner of Mortgage Loans listed in Schedule I and any New Owners, PennyMac Loan Services, LLC, and Midland Loan Services, a division of PNC Bank, National Association (incorporated by reference to Exhibit 10.127 of the Registrant’s Annual Report on Form 10-K for the quarter ended December 31, 2015).

10.98

Amended and Restated Commercial Mortgage Servicing Oversight Agreement, dated as of June 1, 2016, among PennyMac Corp., PennyMac Holdings, LLC, and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.102 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016).

10.99

Master Repurchase Agreement, dated as of December 4, 2015, among Barclays Bank PLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 10, 2015).

10.100

Amendment Number One to Master Repurchase Agreement, dated as of September 29, 2016, among Barclays Bank PLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.97 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 31, 2016).

10.101

Amendment Number Two to Master Repurchase Agreement, dated as of December 2, 2016, among Barclays Bank PLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.

10.102

Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 4, 2015, between PennyMac Loan Services, LLC and Barclays Bank PLC (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 10, 2015).

10.103

Amendment Number One to Mortgage Loan Participation Purchase and Sale Agreement, dated as of December 2, 2016, between PennyMac Loan Services, LLC and Barclays Bank PLC.

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Exhibit
Number

Exhibit Description

10.104

Loan and Security Agreement, dated as of December 4, 2015, among PennyMac Loan Services, LLC, Private National Mortgage Acceptance Company, LLC and Barclays Bank PLC (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 10, 2015).

10.105

Amendment Number One to the Loan and Security Agreement, dated as of February 26, 2016, among Barclays Bank PLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on March 3, 2016)

10.106

Amendment Number Two to the Loan and Security Agreement, dated as of December 2, 2016, among Barclays Bank PLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.

10.107

Amendment Number Three to the Loan and Security Agreement, dated as of January 30, 2017, among Barclays Bank PLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.

10.108

Master Lease Agreement No.  30350-90000, dated as of December 9, 2015, among Private National Mortgage Acceptance Company, LLC and Banc of America Leasing & Capital, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 14, 2015).

10.109

Addendum to Master Lease Agreement No.  30350-90000, dated as of December 9, 2015, among Private National Mortgage Acceptance Company, LLC and Banc of America Leasing & Capital, LLC (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 14, 2015).

10.110

Schedule Number 001 to Master Lease Agreement, dated as of December 9, 2015, among Private National Mortgage Acceptance Company, LLC and Banc of America Leasing & Capital, LLC (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 14, 2015).

10.111

Schedule Number 002 to Master Lease Agreement, dated as of May 4, 2016, among Private National Mortgage Acceptance Company, LLC and Banc of America Leasing & Capital, LLC (incorporated by reference to Exhibit 10.140 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016).

10.112

Schedule Number 003 to Master Lease Agreement, dated as of November 3, 2016, among Private National Mortgage Acceptance Company, LLC and Banc of America Leasing & Capital, LLC (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K as filed with the SEC on November 4, 2016).

10.113

Guaranty, dated as of December 9, 2015, by  PennyMac Loan Services, LLC in favor of Banc of America Leasing & Capital, LLC (incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 14, 2015).

10.114

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 (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on November 22, 2016).

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Exhibit
Number

Exhibit Description

10.115

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 (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on November 22, 2016).

10.116

Master Repurchase Agreement, dated as of August 19, 2016, between PennyMac Loan Services, LLC and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on August 23, 2016).

10.117

Guaranty, dated as of August 19, 2016, by Private National Mortgage Acceptance Company, LLC in favor of JPMorgan Chase Bank. N.A. (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on August 23, 2016).

10.118

Master Repurchase Agreement, dated as of September 19, 2016, between Royal Bank of Canada and PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on September 22, 2016).

10.119

Base Indenture, dated as of December 19, 2016, 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 (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).

10.120

Amended and Restated Base Indenture, dated as of February 16, 2017, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, Credit Suisse First Boston Mortgage Capital LLC, and Pentalpha Surveillance LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on February 23, 2017).

10.121

Series 2016-MSRVF1 Indenture Supplement to Indenture, dated as of December 19, 2016, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, and Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).

10.122

Series 2016-MBSADV1 Indenture Supplement to Indenture, dated as of December 19, 2016, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, and Credit Suisse First Boston Mortgage Capital LLC.

10.123

Omnibus Amendment No. 1 to the Series 2016-MSRVF1 Indenture Supplement and Series 2016-MBSADV1 Indenture Supplement, dated as of February 16, 2017, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, and Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K as filed with the SEC on February 23, 2017).

10.124

Series 2017-GT1 Indenture Supplement, dated as of February 16, 2017, to Amended and Restated Base Indenture, dated as of February 16, 2017, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on February 23, 2017).

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Exhibit
Number

Exhibit Description

10.125

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 (incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).

10.126

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 (incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8-K as filed with the SEC on February 23, 2017).

10.127

Guaranty, dated as of December 19, 2016, made by Private National Mortgage Acceptance Company, LLC, in favor of PNMAC GMSR ISSUER TRUST (incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).

10.128

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 (incorporated by reference to Exhibit 10.5 of the Registrant’s Current Report on Form 8-K as filed with the SEC on February 23, 2017).

10.129

Master Repurchase Agreement, dated as of December 19, 2016, by and among PennyMac Holdings, LLC, PennyMac Loan Services, LLC, and PennyMac Mortgage Investment Trust,  (incorporated by reference to Exhibit 10.5 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).

10.130

Guaranty, dated as of December 19, 2016, by PennyMac Mortgage Investment Trust, in favor of PennyMac Loan Services, LLC (incorporated by reference to Exhibit 10.6 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).

10.131

Subordination, Acknowledgment and Pledge Agreement, dated as of December 19, 2016, between PNMAC GMSR ISSUER TRUST and PennyMac Holdings, LLC (incorporated by reference to Exhibit 10.8 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).

10.132

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 (incorporated by reference to Exhibit 10.8 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).

10.133

Guaranty, dated as of December 19, 2016, by Private National Mortgage Acceptance Company, LLC in favor of Credit Suisse First Boston Mortgage Capital LLC (incorporated by reference to Exhibit 10.9 of the Registrant’s Current Report on Form 8-K as filed with the SEC on December 21, 2016).

10.134

Master Repurchase Agreement, dated as of November 1, 2016, among JPMorgan Chase Bank, National Association, PennyMac Loan Services, LLC, and Private National Mortgage Acceptance Company, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K as filed with the SEC on November 4, 2016).

10.135

Guaranty, dated as of November 1, 2016, by Private National Mortgage Acceptance Company, LLC, in favor of JPMorgan Chase Bank, National Association (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K as filed with the SEC on November 4, 2016).

21.1

 

Subsidiaries of PennyMac Financial Services, Inc.

 

 

 

23.1

 

Consent of Deloitte & Touche LLP.

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Exhibit
Number

Exhibit Description

 

 

 

31.1

 

Certification of Stanford L. KurlandDavid A. Spector pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of Anne D. McCallionAndrew S. Chang pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1*

 

Certification of Stanford L. KurlandDavid 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.

 

 

 

32.2*

 

Certification of Anne D. McCallionAndrew 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.

 

 

 

101

 

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of December 31, 20142016 and December 31, 20132015 (ii) the Consolidated Statements of Income for the years ended December 31, 2014, December 31, 20132016 and December 31, 2012,2015, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2014, December 31, 20132016 and December 31, 2012,2015, (iv) the Consolidated Statements of Cash Flows for the years ended December 31, 2014, December 31, 20132016 and December 31, 20142015 and (v) the Notes to the Consolidated Financial Statements.

 

*

 

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.

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PENNYMAC FINANCIAL SERVICES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014
2016

 

 

Page

Report of Independent Registered Public Accounting Firm 

 

F-2

Financial Statements:

 

 

Consolidated Balance Sheets 

 

F-3

Consolidated Statements of Income 

 

F-4

Consolidated Statements of Changes in Stockholders’ Equity 

 

F-5

Consolidated Statements of Cash Flows 

 

F-6

Notes to Consolidated Financial Statements 

 

F-7

 

 

F-1


 

Table of Contents

REPORTREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

PennyMac Financial Services, Inc.

6101 Condor Drive3043 Townsgate Road

Moorpark,Westlake Village, CA 9302191361

 

We have audited the accompanying consolidated balance sheets of PennyMac Financial Services, Inc. and subsidiaries (the “Company”‘‘Company’’) as of December 31, 20142016 and 2013,2015, and 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, 2014.2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of PennyMac Financial Services, Inc. and subsidiaries at December 31, 20142016 and 2013,2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014,2016, in conformity with accounting principles generally accepted in the United States of America.

 

As discussedWe have also audited, in Note 1 toaccordance with the consolidated financial statements, on May 14, 2013, Private National Mortgage Acceptance Company, LLC (“PNMAC”), a subsidiarystandards of the Public Company sold 12.8 million Class A Units toAccounting Oversight Board (United States), the Company, which represents recapitalization and reorganizationCompany's internal control over financial reporting as of PNMAC. As a resultDecember 31, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the recapitalizationTreadway Commission and reorganization,our report dated March 9, 2017 expressed an unqualified opinion on the accompanying consolidated statements of income, changes in stockholders’ equity, and cash flows for the year ended December 31, 2012 are PNMAC’s historicalCompany's internal control over financial statements.reporting.

 

/s/ DELOITTE & TOUCHE LLP

Los Angeles, California

March 13, 20159, 2017

 

F-2


 

Table of Contents

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETSHEETSS

 

 

 

 

 

 

 

 

 

 

 

December 31, 

 

December 31, 

   

December 31,

2016

   

2015

 

2014

 

2013

(in thousands, except share amounts)

 

(in thousands, except share data)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash

     

 $

76,256 

     

 $

30,639 

Cash (includes $91,788 and $93,757 pledged to creditors)

 $

99,367

     

 $

105,472

Short-term investments at fair value

 

 

21,687 

 

 

142,582 

 

85,964

 

 

46,319

Mortgage loans held for sale at fair value (includes $976,772 and $512,350 pledged to secure mortgage loans sold under agreements to repurchase; and $148,133 and $- pledged to secure mortgage loan participation and sale agreement)

 

 

1,147,884 

 

 

531,004 

Mortgage loans held for sale at fair value (includes $2,125,174 and $1,079,489 pledged to creditors)

 

2,172,815

 

 

1,101,204

Derivative assets

 

 

38,457 

 

 

21,540 

 

82,905

 

 

50,280

Servicing advances, net (includes valuation allowance of $18,686 at December 31, 2014; and $5,564 pledged to secure note payable at December 31, 2013)

 

 

228,630 

 

 

154,328 

Carried Interest due from Investment Funds

 

 

67,298 

 

 

61,142 

Servicing advances, net (includes valuation allowance of $45,425 and $33,458; $81,306 and $68,507 pledged to creditors)

 

348,306

 

 

299,354

Carried Interest due from Investment Funds pledged to creditors

 

70,906

 

 

69,926

Investment in PennyMac Mortgage Investment Trust at fair value

 

 

1,582 

 

 

1,722 

 

1,228

 

 

1,145

Mortgage servicing rights (includes $325,383 and $224,913 mortgage servicing rights at fair value; $392,254 and $258,241 pledged to secure note payable; and $191,166 and $138,723 subject to excess servicing spread financing)

 

 

730,828 

 

 

483,664 

Furniture, fixtures, equipment and building improvements, net

 

 

11,339 

 

 

9,837 

Capitalized software, net

 

 

567 

 

 

764 

Mortgage servicing rights (includes $515,925 and $660,247 at fair value; $1,617,671 and $803,560 pledged to creditors)

 

1,627,672

 

 

1,411,935

Real estate acquired in settlement of loans

 

1,418

 

 

 —

Furniture, fixtures, equipment and building improvements, net (includes $25,134 and $14,034 pledged to creditors)

 

31,321

 

 

16,311

Capitalized software, net (includes $515 and $783 pledged to creditors)

 

11,205

 

 

3,025

Financing receivable from PennyMac Mortgage Investment Trust (pledged to creditors at December 31, 2016)

 

150,000

 

 

150,000

Receivable from PennyMac Mortgage Investment Trust

 

16,416

 

 

18,965

Receivable from Investment Funds

 

 

2,291 

 

 

2,915 

 

1,219

 

 

1,316

Receivable from PennyMac Mortgage Investment Trust

 

 

23,871 

 

 

18,636 

Deferred tax asset

 

 

46,038 

 

 

63,117 

 

 —

 

 

18,378

Loans eligible for repurchase

 

 

72,539 

 

 

46,663 

Mortgage loans eligible for repurchase

 

382,268

 

 

166,070

Other

 

 

37,858 

 

 

15,922 

 

50,892

 

 

45,594

Total assets

 

 $

2,507,125 

 

 $

1,584,475 

 $

5,133,902

 

 $

3,505,294

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans sold under agreements to repurchase

 

 $

822,621 

 

 $

471,592 

Mortgage loan participation and sale agreement

 

 

143,638 

 

 

 —

Note payable

 

 

146,855 

 

 

52,154 

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

 

 

191,166 

 

 

138,723 

Assets sold under agreements to repurchase

 $

1,735,114

 

 $

1,166,731

Mortgage loan participation and sale agreements

 

671,426

 

 

234,872

Notes payable

 

150,942

 

 

61,136

Obligations under capital lease

 

23,424

 

 

13,579

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

 

288,669

 

 

412,425

Derivative liabilities

 

 

6,513 

 

 

2,462 

 

22,362

 

 

9,083

Accounts payable and accrued expenses

 

 

62,715 

 

 

46,387 

 

134,611

 

 

89,915

Mortgage servicing liabilities at fair value

 

 

6,306 

 

 

 —

 

15,192

 

 

1,399

Payable to Investment Funds

 

 

35,908 

 

 

36,937 

 

20,393

 

 

30,429

Payable to PennyMac Mortgage Investment Trust

 

 

123,315 

 

 

81,174 

 

170,036

 

 

162,379

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

 

 

75,024 

 

 

71,056 

 

75,954

 

 

74,315

Liability for loans eligible for repurchase

 

 

72,539 

 

 

46,663 

Income taxes payable

 

25,088

 

 

 —

Liability for mortgage loans eligible for repurchase

 

382,268

 

 

166,070

Liability for losses under representations and warranties

 

 

13,259 

 

 

8,123 

 

19,067

 

 

20,611

Total liabilities

 

 

1,699,859 

 

 

955,271 

 

3,734,546

 

 

2,442,944

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Class A common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 21,577,686 and 20,812,777 shares, respectively

 

 

 

 

Class B common stock—authorized 1,000 shares of $0.0001 par value; 54 and 61 shares issued and outstanding, respectively

 

 

 —

 

 

 —

Class A common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 22,426,779 and 21,990,831 shares, respectively

 

2

 

 

2

Class B common stock—authorized 1,000 shares of $0.0001 par value; issued and outstanding, 49 and 51 shares, respectively

 

 —

 

 

 —

Additional paid-in capital

 

 

162,720 

 

 

153,000 

 

182,772

 

 

172,354

Retained earnings

 

 

51,242 

 

 

14,400 

 

164,549

 

 

98,470

Total stockholders' equity attributable to PennyMac Financial Services, Inc. common stockholders

 

 

213,964 

 

 

167,402 

 

347,323

 

 

270,826

Noncontrolling interest in Private National Mortgage Acceptance Company, LLC

 

 

593,302 

 

 

461,802 

 

1,052,033

 

 

791,524

Total stockholders' equity

 

 

807,266 

 

 

629,204 

 

1,399,356

 

 

1,062,350

Total liabilities and stockholders’ equity

 

 $

2,507,125 

 

 $

1,584,475 

 $

5,133,902

 

 $

3,505,294

 

 

 

 

 

 

 

 

 

 

 

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

F-3


 

Table of Contents

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOMINCOMEE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

Year ended December 31,

 

 

2016

    

2015

    

2014

 

   

2014

   

2013

   

2012

 

 

(in thousands, except earnings per share)

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

     

$

174,861 

     

$

138,722 

     

$

118,170 

 

 

$

539,872

     

$

328,551

     

$

174,861

 

Recapture payable to PennyMac Mortgage Investment Trust

 

 

(7,837)

 

 

(709)

 

 

 —

 

 

 

(8,092)

 

 

(7,836)

 

 

(7,837)

 

 

 

167,024 

 

 

138,013 

 

 

118,170 

 

 

 

531,780

 

 

320,715

 

 

167,024

 

Loan origination fees

 

 

41,576 

 

 

23,575 

 

 

9,634 

 

Mortgage loan origination fees

 

 

125,534

 

 

91,520

 

 

41,576

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

48,719 

 

 

79,712 

 

 

62,906 

 

 

 

86,465

 

 

58,607

 

 

48,719

 

Net loan servicing fees:

 

 

 

 

 

 

 

 

 

 

Loan servicing fees

 

 

 

 

 

 

 

 

 

 

Net mortgage loan servicing fees:

 

 

 

 

 

 

 

 

 

 

Mortgage loan servicing fees:

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

 

173,005 

 

 

61,523 

 

 

20,673 

 

 

 

385,633

 

 

290,474

 

 

173,005

 

From PennyMac Mortgage Investment Trust

 

 

52,522 

 

 

39,413 

 

 

18,608 

 

 

 

50,615

 

 

46,423

 

 

52,522

 

From Investment Funds

 

 

6,425 

 

 

7,099 

 

 

10,831 

 

 

 

2,583

 

 

2,636

 

 

6,425

 

Ancillary and other fees

 

 

26,469 

 

 

11,426 

 

 

2,245 

 

 

 

46,910

 

 

43,139

 

 

26,469

 

 

 

258,421 

 

 

119,461 

 

 

52,357 

 

 

 

485,741

 

 

382,672

 

 

258,421

 

Amortization, impairment and change in fair value of mortgage servicing rights:

 

 

 

 

 

 

 

 

 

 

Related to servicing for non-affiliates

 

 

(70,165)

 

 

(27,028)

 

 

(12,252)

 

Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities

 

 

(324,198)

 

 

(156,939)

 

 

(70,165)

 

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

 

 

28,663 

 

 

(2,423)

 

 

 —

 

 

 

23,923

 

 

3,810

 

 

28,663

 

 

 

(41,502)

 

 

(29,451)

 

 

(12,252)

 

 

 

(300,275)

 

 

(153,129)

 

 

(41,502)

 

Net loan servicing fees

 

 

216,919 

 

 

90,010 

 

 

40,105 

 

Net mortgage loan servicing fees

 

 

185,466

 

 

229,543

 

 

216,919

 

Management fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From PennyMac Mortgage Investment Trust

 

 

35,035 

 

 

32,410 

 

 

12,436 

 

 

 

20,657

 

 

24,194

 

 

35,035

 

From Investment Funds

 

 

7,473 

 

 

7,920 

 

 

9,363 

 

 

 

2,089

 

 

4,043

 

 

7,473

 

 

 

42,508 

 

 

40,330 

 

 

21,799 

 

 

 

22,746

 

 

28,237

 

 

42,508

 

Carried Interest from Investment Funds

 

 

6,156 

 

 

13,419 

 

 

10,473 

 

 

 

980

 

 

2,628

 

 

6,156

 

Net interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

27,771 

 

 

15,632 

 

 

6,354 

 

Interest income:

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

 

73,297

 

 

45,812

 

 

27,771

 

From PennyMac Mortgage Investment Trust

 

 

7,830

 

 

3,343

 

 

 —

 

 

 

81,127

 

 

49,155

 

 

27,771

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

To non-affiliates

 

 

23,965 

 

 

15,582 

 

 

7,879 

 

 

 

83,605

 

 

43,172

 

 

23,965

 

To PennyMac Mortgage Investment Trust

 

 

13,292 

 

 

1,091 

 

 

 —

 

 

 

22,601

 

 

25,365

 

 

13,292

 

 

 

37,257 

 

 

16,673 

 

 

7,879 

 

 

 

106,206

 

 

68,537

 

 

37,257

 

Net interest expense

 

 

(9,486)

 

 

(1,041)

 

 

(1,525)

 

 

 

(25,079)

 

 

(19,382)

 

 

(9,486)

 

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

 

 

(6)

 

 

41 

 

 

817 

 

 

 

224

 

 

(230)

 

 

(6)

 

Results of real estate acquired in settlement of loans

 

 

(82)

 

 

 —

 

 

 —

 

Other

 

 

4,867 

 

 

2,500 

 

 

2,707 

 

 

 

3,853

 

 

1,472

 

 

4,867

 

Total net revenue

 

 

518,277 

 

 

386,559 

 

 

265,086 

 

 

 

931,887

 

 

713,110

 

 

518,277

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

 

190,707 

 

 

148,576 

 

 

124,014 

 

 

 

342,153

 

 

274,262

 

 

190,707

 

Servicing

 

 

48,430 

 

 

7,028 

 

 

3,642 

 

 

 

85,857

 

 

68,085

 

 

48,430

 

Technology

 

 

15,439 

 

 

9,205 

 

 

4,455 

 

 

 

35,322

 

 

25,164

 

 

15,439

 

Loan origination

 

 

22,528

 

 

17,396

 

 

9,554

 

Professional services

 

 

11,108 

 

 

10,571 

 

 

5,568 

 

 

 

18,078

 

 

15,473

 

 

11,108

 

Loan origination

 

 

9,554 

 

 

9,943 

 

 

2,953 

 

Other

 

 

20,006 

 

 

19,110 

 

 

6,131 

 

 

 

44,866

 

 

33,537

 

 

20,006

 

Total expenses

 

 

295,244 

 

 

204,433 

 

 

146,763 

 

 

 

548,804

 

 

433,917

 

 

295,244

 

Income before provision for income taxes

 

 

223,033 

 

 

182,126 

 

 

118,323 

 

 

 

383,083

 

 

279,193

 

 

223,033

 

Provision for income taxes

 

 

26,722 

 

 

9,961 

 

 

 —

 

 

 

46,103

 

 

31,635

 

 

26,722

 

Net income

 

 

196,311 

 

 

172,165 

 

$

118,323 

 

 

 

336,980

 

 

247,558

 

 

196,311

 

Less: Net income attributable to noncontrolling interest

 

 

159,469 

 

 

157,765 

 

 

 

 

 

 

270,901

 

 

200,330

 

 

159,469

 

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

 

$

36,842 

 

$

14,400 

 

 

 

 

 

$

66,079

 

$

47,228

 

$

36,842

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.73 

 

$

0.83 

 

 

 

 

 

$

2.98

 

$

2.17

 

$

1.73

 

Diluted

 

$

1.73 

 

$

0.82 

 

 

 

 

 

$

2.94

 

$

2.17

 

$

1.73

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

21,250 

 

 

17,311 

 

 

 

 

 

 

22,161

 

 

21,755

 

 

21,250

 

Diluted

 

 

75,955 

 

 

75,892 

 

 

 

 

 

 

76,629

 

 

76,104

 

 

75,955

 

 

 

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

 

 

F-4


 

Table of Contents

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITYEQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PennyMac Financial Services, Inc. Stockholders

 

Noncontrolling 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interest in Private 

 

 

 

 

 

 

 

 

 

                          

 

                          

 

 

                          

 

 

                          

 

Additional

 

 

                          

 

National Mortgage

 

 

                          

 

 

 

Members'

 

Number of Shares

 

Common stock

 

paid-in

 

Retained

 

Acceptance

 

 

 

 

 

   

equity

 

Class A

 

Class B

 

Class A

 

Class B

 

capital

 

earnings

 

Company, LLC

 

Total equity

 

 

 

(in thousands)

 

Balance at December 31, 2011

    

$

123,915 

    

 —

    

 —

    

$

 —

    

$

 —

    

$

 —

    

$

 —

    

$

 —

    

$

123,915 

 

Net income

 

 

118,323 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

118,323 

 

Unit-based compensation expense

 

 

20,307 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

20,307 

 

Contributions

 

 

15,058 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

15,058 

 

Redemptions

 

 

(6)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(6)

 

Distributions

 

 

(15,847)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(15,847)

 

Balance at December 31, 2012

 

 

261,750 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

261,750 

 

Net income

 

 

76,834 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

76,834 

 

Unit-based compensation expense

 

 

238 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

238 

 

Distributions

 

 

(19,623)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(19,623)

 

Partner capital issuance costs

 

 

(3,745)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(3,745)

 

Exchange of existing partner units to Class A units of Private National Mortgage Acceptance Company, LLC

 

 

(315,454)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

315,454 

 

 

 —

 

Balance post-reorganization

 

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

315,454 

 

 

315,454 

 

Issuance of common shares in initial public offering, net of issuance costs

 

 

 —

 

12,778 

 

 —

 

 

 

 

 —

 

 

229,999 

 

 

 —

 

 

 —

 

 

230,000 

 

Underwriting and offering costs

 

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(13,290)

 

 

 —

 

 

(196)

 

 

(13,486)

 

Initial recognition of noncontrolling interest

 

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(127,160)

 

 

 —

 

 

127,160 

 

 

 —

 

Net income

 

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

14,400 

 

 

80,931 

 

 

95,331 

 

Stock and unit-based compensation

 

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

881 

 

 

 —

 

 

2,818 

 

 

3,699 

 

Distributions

 

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(3,809)

 

 

(3,809)

 

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

 

 

 —

 

8,035 

 

 —

 

 

 

 

 —

 

 

60,555 

 

 

 —

 

 

(60,556)

 

 

 —

 

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

 

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

2,015 

 

 

 —

 

 

 —

 

 

2,015 

 

Balance at December 31, 2013

 

 

 —

 

20,813 

 

 —

 

 

 

 

 —

 

 

153,000 

 

 

14,400 

 

 

461,802 

 

 

629,204 

 

Net income

 

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

36,842 

 

 

159,469 

 

 

196,311 

 

Stock and unit-based compensation

 

 

 —

 

33 

 

 —

 

 

 —

 

 

 —

 

 

2,895 

 

 

 —

 

 

7,436 

 

 

10,331 

 

Distributions

 

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(28,298)

 

 

(28,298)

 

Issuance of common stock in settlement of directors' fees

 

 

 —

 

14 

 

 —

 

 

 —

 

 

 —

 

 

222 

 

 

 —

 

 

 —

 

 

222 

 

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

 

 

 —

 

718 

 

 —

 

 

 —

 

 

 —

 

 

7,107 

 

 

 —

 

 

(7,107)

 

 

 —

 

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

 

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(504)

 

 

 —

 

 

 —

 

 

(504)

 

Balance at December 31, 2014

 

$

 —

 

21,578 

 

 —

 

$

 

$

 —

 

$

162,720 

 

$

51,242 

 

$

593,302 

 

$

807,266 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

 

Noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interest in Private 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

National Mortgage

 

 

 

 

 

 

 

Number of

 

 

Par

 

 

paid-in

 

 

Retained

 

 

Acceptance

 

 

 

 

 

  

  

shares

  

 

value

  

 

capital

  

 

earnings

  

 

Company, LLC

  

 

Total

 

 

 

 

(in thousands)

 

Balance at December 31, 2013

 

 

20,813

 

$

2

 

$

153,000

 

$

14,400

 

$

461,802

 

$

629,204

 

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

36,842

 

 

159,469

 

 

196,311

 

Stock and unit-based compensation

 

 

33

 

 

 —

 

 

2,895

 

 

 —

 

 

7,436

 

 

10,331

 

Distributions

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(28,298)

 

 

(28,298)

 

Issuance of common stock in settlement of directors' fees

 

 

14

 

 

 —

 

 

222

 

 

 —

 

 

 —

 

 

222

 

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

 

 

718

 

 

 —

 

 

7,107

 

 

 —

 

 

(7,107)

 

 

 —

 

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

 

 

 —

 

 

 —

 

 

(504)

 

 

 —

 

 

 —

 

 

(504)

 

Balance at December 31, 2014

 

 

21,578

 

 

2

 

 

162,720

 

 

51,242

 

 

593,302

 

 

807,266

 

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

47,228

 

 

200,330

 

 

247,558

 

Stock and unit-based compensation

 

 

77

 

 

 —

 

 

5,017

 

 

 —

 

 

12,504

 

 

17,521

 

Distributions

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(9,630)

 

 

(9,630)

 

Issuance of common stock in settlement of directors' fees

 

 

17

 

 

 —

 

 

297

 

 

 —

 

 

 —

 

 

297

 

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

 

 

319

 

 

 —

 

 

4,982

 

 

 —

 

 

(4,982)

 

 

 —

 

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

 

 

 —

 

 

 —

 

 

(662)

 

 

 —

 

 

 —

 

 

(662)

 

Balance at December 31, 2015

 

 

21,991

 

 

2

 

 

172,354

 

 

98,470

 

 

791,524

 

 

1,062,350

 

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

66,079

 

 

270,901

 

 

336,980

 

Stock and unit-based compensation

 

 

111

 

 

 —

 

 

4,646

 

 

 —

 

 

11,701

 

 

16,347

 

Distributions

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(15,216)

 

 

(15,216)

 

Issuance of common stock in settlement of directors' fees

 

 

24

 

 

 —

 

 

313

 

 

 —

 

 

 —

 

 

313

 

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

 

 

301

 

 

 —

 

 

6,877

 

 

 —

 

 

(6,877)

 

 

 —

 

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

 

 

 —

 

 

 —

 

 

(1,418)

 

 

 —

 

 

 —

 

 

(1,418)

 

Balance of December 31, 2016

 

 

22,427

 

$

2

 

$

182,772

 

$

164,549

 

$

1,052,033

 

$

1,399,356

 

 

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

 

 

F-5


 

Table of Contents

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWSFLOWS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

 

2014

 

2013

 

2012

 

 

 

(in thousands)

 

Cash flow from operating activities

 

 

                              

 

 

                              

 

 

                              

 

Net income

 

$

196,311 

 

$

172,165 

 

$

118,323 

 

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

 

 

 

 

 

 

 

 

 

 

Net gains on mortgage loans held for sale at fair value

 

 

(167,024)

 

 

(138,013)

 

 

(118,685)

 

Accrual of servicing rebate to Investment Funds

 

 

2,206 

 

 

700 

 

 

885 

 

Amortization, impairment and change in fair value of mortgage servicing rights

 

 

41,502 

 

 

29,451 

 

 

12,252 

 

Carried Interest from Investment Funds

 

 

(6,156)

 

 

(13,419)

 

 

(10,473)

 

Accrual of interest on excess servicing spread financing

 

 

13,292 

 

 

1,348 

 

 

 —

 

Amortization of debt issuance costs and commitment fees relating to financing facilities

 

 

5,989 

 

 

5,014 

 

 

1,866 

 

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

 

 

140 

 

 

175 

 

 

(650)

 

Change in fair value of real estate acquired in settlement of loans

 

 

 —

 

 

22 

 

 

 —

 

Stock and unit-based compensation expense

 

 

10,331 

 

 

3,937 

 

 

20,308 

 

Provision for servicing advance losses

 

 

18,686 

 

 

 —

 

 

 —

 

Depreciation and amortization

 

 

1,365 

 

 

824 

 

 

520 

 

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

 

 

(16,431,338)

 

 

(16,113,806)

 

 

(8,864,264)

 

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

 

 

(1,049,838)

 

 

(30,950)

 

 

 —

 

Originations of mortgage loans held for sale, net

 

 

(1,951,070)

 

 

(1,104,051)

 

 

(539,160)

 

Sale and principal payments of mortgage loans held for sale

 

 

18,785,683 

 

 

17,105,047 

 

 

9,053,364 

 

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

 

 

8,081 

 

 

12,339 

 

 

3,622 

 

Repurchase of loans subject to representations and warranties

 

 

(4,089)

 

 

(6,696)

 

 

 —

 

Repurchase of real estate acquired in settlement of loans subject to representations and warranties

 

 

 —

 

 

(309)

 

 

 —

 

Sale of real estate acquired in settlement of loans subject to representations and warranties

 

 

 —

 

 

287 

 

 

 —

 

Increase in servicing advances

 

 

(98,401)

 

 

(60,189)

 

 

(30,855)

 

(Increase) decrease in receivable from Investment Funds

 

 

(1,582)

 

 

57 

 

 

3,797 

 

Decrease (increase) in receivable from PennyMac Mortgage Investment Trust

 

 

1,280 

 

 

173 

 

 

(3,970)

 

Decrease in deferred tax asset

 

 

21,922 

 

 

9,954 

 

 

 —

 

Revaluation of payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement

 

 

(1,378)

 

 

 —

 

 

 —

 

Increase in other assets

 

 

(31,921)

 

 

(16,387)

 

 

(5,998)

 

Increase in accounts payable and accrued expenses

 

 

16,437 

 

 

10,109 

 

 

22,704 

 

(Decrease) increase in payable to Investment Funds

 

 

(1,029)

 

 

142 

 

 

7,173 

 

Increase in payable to PennyMac Mortgage Investment Trust

 

 

41,647 

 

 

33,686 

 

 

21,184 

 

Net cash used in operating activities

 

 

(578,954)

 

 

(98,390)

 

 

(308,057)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow from investing activities

 

 

 

 

 

 

 

 

 

 

Decrease (increase) in short-term investments

 

 

120,895 

 

 

(89,418)

 

 

(37,123)

 

Purchase of mortgage servicing rights

 

 

(135,480)

 

 

(195,871)

 

 

 —

 

Sale of mortgage servicing rights

 

 

10,916 

 

 

550 

 

 

 —

 

Settlements of derivative financial instruments used for hedging

 

 

18,620 

 

 

 —

 

 

 —

 

Purchase of furniture, fixtures, equipment and building improvements

 

 

(4,613)

 

 

(6,615)

 

 

(3,370)

 

Acquisition of capitalized software

 

 

(123)

 

 

(343)

 

 

(503)

 

(Increase) decrease in margin deposits and restricted cash

 

 

(3,463)

 

 

6,916 

 

 

(4,539)

 

Net cash provided by (used in) investing activities

 

 

6,752 

 

 

(284,781)

 

 

(45,535)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow from financing activities

 

 

 

 

 

 

 

 

 

 

Sale of loans under agreements to repurchase

 

 

17,217,767 

 

 

15,805,464 

 

 

8,528,184 

 

Repurchase of loans sold under agreements to repurchase

 

 

(16,866,738)

 

 

(15,727,406)

 

 

(8,212,350)

 

Sale of mortgage loan participation certificates

 

 

2,817,616 

 

 

 —

 

 

 —

 

Repayment of mortgage loan participation certificates

 

 

(2,673,978)

 

 

 —

 

 

 —

 

Borrowings on note payable

 

 

274,636 

 

 

211,253 

 

 

78,420 

 

Repayments of note payable

 

 

(179,935)

 

 

(212,112)

 

 

(44,009)

 

Issuance of excess servicing spread financing

 

 

95,892 

 

 

139,028 

 

 

 —

 

Repayment of excess servicing spread financing

 

 

(39,256)

 

 

(4,076)

 

 

 —

 

Distributions to Private National Mortgage Acceptance Company, LLC partners

 

 

(28,185)

 

 

(23,432)

 

 

(15,847)

 

Decrease in leases payable

 

 

 —

 

 

(1)

 

 

 —

 

Issuance of common stock

 

 

 —

 

 

230,000 

 

 

 —

 

Payment of common stock underwriting and offering costs

 

 

 —

 

 

(13,486)

 

 

 —

 

Payment by noncontrolling interest of common stock issuance costs

 

 

 —

 

 

(3,745)

 

 

 —

 

Collection of subscriptions receivable relating to noncontrolling interest

 

 

 —

 

 

 —

 

 

15,058 

 

Noncontrolling interest partners' capital redemptions

 

 

 —

 

 

 —

 

 

(6)

 

Net cash provided by financing activities

 

 

617,819 

 

 

401,487 

 

 

349,450 

 

Net increase in cash

 

 

45,617 

 

 

18,316 

 

 

(4,142)

 

Cash at beginning of period

 

 

30,639 

 

 

12,323 

 

 

16,465 

 

Cash at end of period

 

$

76,256 

 

$

30,639 

 

$

12,323 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

 

2016

    

2015

    

2014

 

 

 

(in thousands)

 

Cash flow from operating activities

 

 

                              

 

 

                              

 

 

                              

 

Net income

 

$

336,980

 

$

247,558

 

$

196,311

 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

 

 

 

Net gains on mortgage loans held for sale at fair value

 

 

(531,780)

 

 

(320,715)

 

 

(167,024)

 

Accrual of servicing rebate payable to Investment Funds

 

 

306

 

 

1,269

 

 

2,206

 

Amortization, impairment and change in fair value of mortgage servicing rights and excess servicing spread

 

 

300,275

 

 

153,129

 

 

41,502

 

Carried Interest from Investment Funds

 

 

(980)

 

 

(2,628)

 

 

(6,156)

 

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

 

 

(29,234)

 

 

(16,875)

 

 

 —

 

Amortization of debt issuance costs and commitment fees relating to financing facilities

 

 

11,052

 

 

7,775

 

 

5,989

 

Accrual of interest on excess servicing spread financing

 

 

22,601

 

 

25,365

 

 

13,292

 

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

 

 

(83)

 

 

437

 

 

140

 

Results of real estate acquired in settlement in loans

 

 

82

 

 

 —

 

 

 —

 

Stock and unit-based compensation expense

 

 

16,198

 

 

17,521

 

 

10,331

 

Provision for servicing advance losses

 

 

35,503

 

 

29,782

 

 

18,686

 

Depreciation and amortization

 

 

5,849

 

 

2,423

 

 

1,365

 

Revaluation of payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement

 

 

(551)

 

 

1,695

 

 

(1,378)

 

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

 

 

(42,051,505)

 

 

(31,490,920)

 

 

(16,431,338)

 

Originations of mortgage loans held for sale

 

 

(6,491,107)

 

 

(4,143,240)

 

 

(1,951,070)

 

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

 

 

(2,168,685)

 

 

(1,116,700)

 

 

(1,049,838)

 

Sale and principal payments of mortgage loans held for sale

 

 

49,633,909

 

 

36,679,638

 

 

18,785,683

 

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

 

 

21,541

 

 

28,445

 

 

8,081

 

Repurchase of mortgage loans subject to representations and warranties

 

 

(19,248)

 

 

(22,601)

 

 

(4,089)

 

Increase in servicing advances

 

 

(85,955)

 

 

(100,506)

 

 

(98,401)

 

Increase in receivable from Investment Funds

 

 

(209)

 

 

(294)

 

 

(1,582)

 

Decrease in receivable from PennyMac Mortgage Investment Trust

 

 

2,969

 

 

7,637

 

 

1,280

 

Decrease in deferred tax asset

 

 

18,668

 

 

29,726

 

 

21,922

 

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

 

 

 —

 

 

(5,132)

 

 

 —

 

Increase in other assets

 

 

(19,282)

 

 

(18,100)

 

 

(31,921)

 

Increase in accounts payable and accrued expenses

 

 

33,041

 

 

26,307

 

 

16,437

 

Decrease in payable to Investment Funds

 

 

(10,036)

 

 

(5,479)

 

 

(1,029)

 

Increase in payable to PennyMac Mortgage Investment Trust

 

 

5,589

 

 

37,627

 

 

41,647

 

Increase in income taxes payable

 

 

25,570

 

 

 —

 

 

 —

 

Net cash (used in) provided by operating activities

 

 

(938,522)

 

 

53,144

 

 

(578,954)

 

Cash flow from investing activities

 

 

 

 

 

 

 

 

 

 

(Increase) decrease in short-term investments

 

 

(39,645)

 

 

(24,632)

 

 

120,895

 

Advance on financing receivable from PennyMac Mortgage Investment Trust

 

 

 —

 

 

(168,546)

 

 

 —

 

Repayment of financing receivable from PennyMac Mortgage Investment Trust

 

 

 —

 

 

18,546

 

 

 —

 

Purchase of mortgage servicing rights

 

 

(146)

 

 

(382,824)

 

 

(135,480)

 

Sale of mortgage servicing rights

 

 

 —

 

 

 —

 

 

10,916

 

Net settlement of derivative financial instruments used for hedging

 

 

(27,315)

 

 

2,033

 

 

18,620

 

Purchase of furniture, fixtures, equipment and leasehold improvements

 

 

(21,852)

 

 

(9,122)

 

 

(4,613)

 

Acquisition of capitalized software

 

 

(8,537)

 

 

(2,782)

 

 

(123)

 

Decrease (increase) in margin deposits and restricted cash

 

 

62,756

 

 

4,185

 

 

(3,463)

 

Net cash (used in) provided by investing activities

 

 

(34,739)

 

 

(563,142)

 

 

6,752

 

Cash flow from financing activities

 

 

 

 

 

 

 

 

 

 

Sale of assets under agreements to repurchase

 

 

45,925,047

 

 

33,125,237

 

 

17,217,767

 

Repurchase of assets sold under agreements to repurchase

 

 

(45,355,531)

 

 

(33,187,830)

 

 

(16,866,738)

 

Issuance of mortgage loan participation certificates

 

 

32,336,793

 

 

17,722,964

 

 

2,817,616

 

Repayment of mortgage loan participation certificates

 

 

(31,900,130)

 

 

(17,631,704)

 

 

(2,673,978)

 

Advances on notes payable

 

 

122,920

 

 

352,243

 

 

274,636

 

Repayment of notes payable

 

 

(33,661)

 

 

(29,411)

 

 

(179,935)

 

Issuance of excess servicing spread financing

 

 

 —

 

 

271,554

 

 

95,892

 

Repayment of excess servicing spread financing

 

 

(69,992)

 

 

(78,578)

 

 

(39,256)

 

Settlement of excess servicing spread financing

 

 

(59,045)

 

 

 —

 

 

 —

 

Advances of obligations under capital lease

 

 

16,952

 

 

13,579

 

 

 —

 

Repayment of obligations under capital lease

 

 

(7,107)

 

 

 —

 

 

 —

 

Payment of debt issuance costs

 

 

(11,747)

 

 

(9,210)

 

 

 —

 

Consideration received for acceptance of mortgage servicing liability

 

 

10,139

 

 

 —

 

 

 —

 

Proceeds from common stock options exercised

 

 

149

 

 

 —

 

 

 —

 

Distribution to Private National Mortgage Acceptance Company, LLC members

 

 

(7,631)

 

 

(9,630)

 

 

(28,185)

 

Net cash provided by financing activities

 

 

967,156

 

 

539,214

 

 

617,819

 

Net (decrease) increase in cash

 

 

(6,105)

 

 

29,216

 

 

45,617

 

Cash at beginning of year

 

 

105,472

 

 

76,256

 

 

30,639

 

Cash at end of year

 

$

99,367

 

$

105,472

 

$

76,256

 

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

 

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PENNYMAC FINANCIAL SERVICES, INC.

NOTESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1—Organization and Basis of Presentation

PennyMac Financial Services, Inc. (“PFSI” or the “Company”) was formed as a Delaware corporation on December 31, 2012. Pursuant to a reorganization, the Company became a holding corporation and its primary asset is an equity interest in Private National Mortgage Acceptance Company, LLC (“PennyMac”). The Company is the managing member of PennyMac, and it operates and controls all of the businesses and affairs of PennyMac, subject to the consent rights of other members under certain circumstances, and consolidates the financial results of PennyMac and its subsidiaries.

 

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

·

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

Presently, PCM has management agreements with PennyMac Mortgage Investment Trust (“PMT”), a publicly held real estate investment trust, and three investment funds: PNMAC Mortgage Opportunity Fund, LLC and PNMAC Mortgage Opportunity Fund, L.P., (the “Master Fund”), both registered under the Investment Company Act of 1940, as amended; andamended, an affiliate of these registered funds, PNMAC Mortgage Opportunity Fund Investors, LLC (collectively, the “Investment Funds”), and PennyMac Mortgage Investment Trust (“PMT”), a publicly held real estate investment trust (“REIT”). Together, the Investment Funds and PMT are referred to as the “Advised Entities.”

·

PennyMac Loan Services, LLC (“PLS”)—a Delaware limited liability company that services portfolios of residential mortgage loans on behalf of non-affiliates orand the Advised Entities, purchases, originates and sells new prime credit quality residential mortgage loans and engages in other mortgage banking activities for its own account and the account of PMT.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 Opportunity Fund Associates, LLC (“PMOFA”)—a Delaware limited liability company and the general partner of the Master Fund. PMOFA is entitled to incentive fees representing allocations of profits (“Carried Interest”) from the Master Fund.Fund.

 

Initial Public Offering and Recapitalization

On May 14, 2013, PFSI completed an initial public offering (“IPO”) in which it sold approximately 12.8 million shares of its Class A common stock, at a public offering price of $18.00 per share. PFSI received net proceeds of $216.8 million, after deducting underwriting discounts and commissions, from sales of its shares in the IPO. PFSI used these net proceeds to purchase approximately 12.8 million Class A units of PennyMac.

The purchase of 12.8 million Class A units of PennyMac has been accounted for as a transfer of interests under common control. Accordingly, the accompanying consolidated financial statements reflect a reclassification of

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members’ equity to noncontrolling interests in the Company of $315.5 million. This amount represents the carrying value in the Company of the existing owners of PennyMac on the date of the IPO.

Before the IPO, PennyMac completed a reorganization by amending its limited liability company agreement to convert all classes of ownership interests held by its existing owners to a single class of common units. The conversion of existing interests was based on the various interests’ liquidation priorities as specified in PennyMac’s prior limited liability company agreement. In connection with that reorganization, PFSI became the sole managing member of PennyMac.

After the completion of the recapitalization and reorganization transactions, PennyMac became a consolidated subsidiary of the Company. Accordingly, PennyMac’s consolidated financial statements are the Company’s historical financial statements. The historical consolidated financial statements of PennyMac are reflected herein based on the historical ownership interests of the then-existing PennyMac unitholders.

Tax Receivable Agreement

As part of the IPO, PFSI entered into an Exchange Agreement with PennyMac’s existing unitholders whereby the existing unitholders may exchange their PennyMac units for PFSI stock. PennyMac has made an election pursuant to Section 754 of the Internal Revenue Code which remains in effect. As a result of this election an exchange under the Exchange Agreement results in a special adjustment for PFSI that may increase PFSI’s tax basis of certain assets of PennyMac that otherwise would not have been available. These increases in tax basis may reduce the amount of income tax that PFSI would otherwise be required to pay in the future. These increases in tax basis may also decrease tax gains (or increase tax losses) on future dispositions of certain assets to the extent a portion of the increased tax basis is allocated to those assets.

As part of the IPO, PFSI entered into a tax receivable agreement with PennyMac’s existing unitholders that will provide for the payment by PFSI to PennyMac exchanged unitholders in an amount equal to 85% of the amount of the benefits, if any, that PFSI is deemed to realize as a result of (i) increases in tax basis resulting from the exchanges noted above 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.

The term of the tax receivable agreement will continue until all such tax benefits have been utilized or expired, unless PFSI exercises its right to terminate the tax receivable agreement. In the event of termination of the tax receivable agreement, the Company would be required to make an immediate payment equal to the present value of the anticipated future net tax benefits, which upfront payment may be made years in advance of the actual realization of such future benefits.

Note 2—Concentration of Risk

A substantial portion of the Company’s activities relate to the Advised Entities. Fees charged toRevenues generated from these entities (generally comprised of management fees, mortgage loan servicing fees, Carried Interest and fulfillment fees) totaled 32%18%, 45%16% and 47%32% of total net revenues for the years ended December 31, 2014, 20132016, 2015 and 2012,2014, respectively.

 

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Note 3—Significant Accounting Policies

A description of the Company’s significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows.

 

Basis of Presentation

 

The Company’s consolidated financial statements have been prepared in compliance with generally accepted accounting principles (“GAAP”)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”).

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Principles of Consolidation

 

The consolidated financial statements include the accounts of PFSI, PennyMac and all of its wholly‑owned subsidiaries. Intercompany accounts and transactions have been eliminated.

 

Use of Estimates

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

 

Fair Value

 

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. These may include quoted prices for similar assets and liabilities, interest rates, prepayment speeds, credit risk and other inputs.

·

Level 3—Prices determined using significant unobservable inputs. In situations where observable inputs are unavailable, (for example, when there is little or no market activity for an asset or liability at the end of the period), unobservable inputs may be used. Unobservable inputs reflect the Company’s own assumptionsjudgments about the factors that market participants use in pricing an asset or liability, and are based on the best information available in the circumstances.

 

While management believes itsAs a result of the difficulty in observing certain significant valuation methods are appropriate and consistent with those used by other market participants, the use of different methods or assumptions to estimate theinputs affecting “Level 3” fair value assets and liabilities, the Company is required to make judgments regarding their fair values. Different persons in possession of certain financial statement items could result in athe same facts may reasonably arrive at different estimate of fair value at the reporting date. Those estimated values may differ significantly from the values that would have been used had a readily available market for such items existed, or had such items been liquidated, and those differences could be materialconclusions as to the financial statements.

Management incorporates lackinputs to be applied in valuing these assets and liabilities and their fair values. Likewise, due to the general illiquidity of liquidity into its fair value estimates based on the typesome of asset or liability measuredthese assets and the valuation method used. The Company uses discounted cash flow techniques to estimate fair value. These techniques incorporate forecasting of expected cash flows discountedliabilities, subsequent transactions may be at market discount rates that are intended to reflect the lack of liquidity in the market.values significantly different from those reported.

 

Short‑Term Investments

 

Short‑term investments, which represent investments in money market accounts with a depository institution, 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 financial statement items.assets.

 

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Mortgage Loans Held for Sale at Fair Value

 

Management has elected to account for mortgage loans held for sale at fair value, with changes in fair value recognized in current period income, to more timely reflect the Company’s performance. All changes in fair value, including changes arising from the passage of time, are recognized as a component of Net gains on mortgage loans held for sale at fair value. The Company classifies most of the mortgage loans held for sale at fair value as “Level 2” fair

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value financial statement items.assets. Certain of the Company’s mortgage loans held for sale may not be readily saleable due to identified defects or delinquency. Such mortgage loans are classified as “Level 3” financial statement items.fair value assets.

 

Sale Recognition

 

The Company recognizes transfers of mortgage loans as sales when it surrenders control over the mortgage loans. Control over transferred mortgage loans is deemed to be surrendered when (i) the mortgage loans have been isolated from the Company, (ii) the transferee has the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred mortgage loans, and (iii) the Company does not maintain effective control over the transferred mortgage loans through either (a) an agreement that entitles and obligates the Company to repurchase or redeem them before their maturity or (b) the ability to unilaterally cause the holder to return the specific mortgage loans.

 

Interest Income Recognition

 

Interest income on mortgage loans held for sale at fair value is recognized over the life of the mortgage loans using their contractual interest rates. Income recognition is suspended and the accrued unpaid interest receivable is reversed against interest income when mortgage loans become 90 days delinquent, or when, in management’s opinion, a full recovery of interest and principal becomes doubtful. Income recognition is resumed when the mortgage loan becomes contractually current.

 

Derivative Financial Instruments

 

The Company is exposed to price risk relative to its mortgage loans held for sale as well as to the commitments it makes to loan applicants to originate or to PMT to acquire mortgage loans at specified interest rates (“interest rate lock commitments” or “IRLCs”). The Company bears price risk from the time a commitment to originatefund a mortgage loan is made to a borrower or to purchase a mortgage loan from PMT, to the time the mortgage loan is sold. During this period, the Company is exposed to losses if mortgage market interest rates increase, because the fair value of the purchase commitment or prospective mortgage loan held for sale decreases. The Company also is exposed to risk relative to the fair value of its mortgage servicing rights (“MSRs”). The Company is exposed to loss in fair value of its MSRs when interest rates decrease.

The Company engages in interest rate risk management activities in an effort to reduce the variability of earnings caused by changes in market interest rates. To manage this fair value risk resulting from interest rate risk, the Company uses derivative financial instruments acquired with the intention of reducing the risk that changes in market interest rates will result in unfavorable changes in the fair value of the Company’s IRLCs, inventory of mortgage loans held for sale and MSRs.

 

IRLCs are accounted for as derivative financial instruments. The Company manages the risk created by IRLCs relating to mortgage loans held for sale by entering into forward sale agreements to sell the mortgage loans and by the purchase and sale of mortgage‑backed securities (“MBS”) options and futures. Such agreements are also accounted for as derivative financial instruments. From time to time, theseThese instruments and other interest-rate derivatives are also used to manage the risk created by changes in prepayment speeds on certain of the MSRs the Company holds. The Company classifies its IRLCs as “Level 3” financial statement itemsfair value assets and liabilities and the derivative financial instruments it acquires to manage the risks created by IRLCs, and mortgage loans held for sale and MSRs as “Level 1” or “Level 2” fair value financial statement items.assets and liabilities.

 

The Company does not use derivative financial instruments for purposes other than in support of its risk management activities. The Company accounts for its derivative financial instruments as free‑standing derivatives. The

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Company does not designate its derivative financial instruments for hedge accounting. 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 derivativesderivative financial instruments hedging IRLCs, and mortgage loans held for sale at fair value and MSRs are included in Net gains on mortgage loans held for sale at fair value in the Company’s consolidated statements of income. For derivatives hedging MSRs, changes in fair value are includedor 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.

 

When the Company has multiple derivative financial instruments with the same counterparty under 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.

 

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Servicing Advances

 

Servicing advances represent advances made on behalf of borrowers and the mortgage loans’ investors to fund delinquent balances for property taxtaxes and insurance premiums and out of pocketout-of-pocket collection costs (e.g., preservation and restoration of mortgaged or real estate owned property, legal fees, appraisals and insurance premiums)appraisals). Servicing advances are made in accordance with the Company’s servicing agreements and, when made, are deemed recoverable upon liquidation.recoverable. The Company periodically reviews servicing advances for collectability and provides a valuation allowance for amounts estimated to be uncollectable. Servicing advances are written off when they are deemed uncollectible.uncollectable.

 

Carried Interest Due from Investment Funds

 

Carried Interest, in general terms, is the share of any profits in excess of specified levels that the general partners receive as compensation. The Company has a general partnership interest or other Carried Interest arrangement with the Investment Funds, and earns Carried Interest thereunder. Carried Interest, in general terms, is the share of any profits that the general partners receive as compensation. The Company determines the amount of Carried Interest to be recorded each period is based on the cash flows that would be producedrealized by all partners assuming terminationliquidation of the Investment Funds agreements at period end.Funds’ remaining investments as of the measurement date.

 

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 financial statement item.asset.

 

Mortgage Servicing Rights and Mortgage Servicing Liabilities

 

MSRs and MSLs arise from contractual agreements between the Company and investors (or their agents) in mortgage securities and mortgage loans. Under these contracts, the Company performs mortgage loan servicing functions in exchange for fees and other remuneration. The servicing functions typically performed include, among other responsibilities, collecting and remitting loan payments; responding to borrower inquiries; accounting for principal and interest; holding custodial (impound) funds for payment of property taxes and insurance premiums; counseling delinquent mortgagors; supervising the acquisition of real estate in settlement of loans (“REO”) and property disposition. Real estate acquired in settlement of loans (“REO”)REO represents real estate that collateralized the mortgage loans before the properties were acquired in settlement of loans.

 

The fair value of MSR assetsMSRs and liabilitiesMSLs is derived from the net positive or negative, respectively, cash flows associated with the servicing contracts. The Company receives a servicing fee ranging generally from 0.19% to 0.57% annually, net of related guarantee fees, on the remaining outstanding principal balances of the mortgage loans subject to the servicing contracts. The servicing fees are collected from the monthly payments made by the mortgagors. The Company is contractually entitled to receive other remuneration including rights to various mortgagor‑contracted fees such as late charges and collateral reconveyance charges, and the Company is generally entitled to retain the interest

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earned on funds held pending remittance related to its collection of mortgagor payments. The Company also generally has the right to solicit the mortgagors for other products and services as well as for new mortgages for those considering refinancing or purchasing a new home.

 

The Company recognizes MSRs and MSLs initially at fair value, either as proceeds from or liabilities incurred in, sales of mortgage loans where the Company assumes the obligation to service the mortgage loan in the sale transaction, or from the purchase of MSRs. MSRs or receipt of cash for acceptance of the MSLs.

The Company’s subsequent accounting for MSRs generally relate to either pools of distressed loans or pools of loans that were originated to borrowers with prime credit characteristics or are backed by government insurance. Accordingly, the assumptions used in the valuation are differentiatedand MSLs is based on the higher expectationclass of the delinquency migration of the MSRs backed by distressed loans and significantly higher expected cost to service and advance payments for MSRs backed by the distressed loans.

MSR or MSL. The Company has 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%;

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and purchased MSRs financed in part through the transfer of the right to receive excess servicing spread (“ESS”) cash flows. The Company’s subsequent accounting for MSRs is based on the class of MSRs. Originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5% are accounted for using the amortization method. Originated MSRs backed by loans with initial interest rates of more than 4.5% and purchased MSRs financed in part by ESS are accounted for at fair value with changes in fair value recorded in current period income. These classes related to the method for managing the risks of the MSRs.MSLs are carried at fair value with changes in fair value recorded in current period income.

 

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 financial statement items.

The Company uses a discounted cash flow approach to estimate the fair value of MSRs. This approach consists of projecting servicing cash flows. The inputs used in the Company’s discounted cash flow model are based on market factors which management believes are consistent with assumptionsassets and data used by market participants valuing similar MSRs.

The key inputs used in the valuation of MSRs include mortgage prepayment speeds, cost to service the loans and discount rates. These inputs can, and generally do, change from period to period as market conditions change.liabilities.

 

MSRs and MSLs are generally subject to lossreduction in fair value when mortgage interest rates decline. Decliningdecrease. Decreasing mortgage interest rates normally encourage increased mortgage refinancing activity. Increased refinancing activity reduces the expected life of the mortgage loans underlying the MSRs and MSLs, thereby reducing their fair value. Reductions in the fair value of MSRs and MSLs affect earnings primarily through change in fair value and impairment charges. For MSRs backed by mortgage loans with historically low mortgage interest rates, factors other than interest rates (such as housing price changes) take on increasing influence on prepayment behavior of the underlying mortgage loans.

 

MSRs Accounted for Using the Amortization Method

 

The Company amortizes MSRs that are accounted for using the amortization method. MSR amortization is 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 are determined at the beginning of each month using prepayment assumptionsinputs applicable at that time.

 

MSRs accounted for using the amortization method are periodically evaluated for impairment. Impairment occurs when the current fair value of the MSRs decreases below the asset’s carrying value (carrying value is the MSR’s amortized cost reduced by any related valuation allowance).cost. If MSRs are impaired, the impairment is 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 is adjusted through a valuation allowance. If the fair value of impaired MSRs subsequently increases, the increase in fair value is recognized in current‑period income. When an increase in fair value of MSR is recognized, the valuation allowance is adjusted to increase the carrying value of the MSRs only to the extent of the valuation allowance.

 

For impairment evaluation purposes, the Company stratifies its MSRs by predominant risk characteristic when evaluating for impairment. For purposes of performing its MSR impairment evaluation, the Company stratifies 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 are 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 below 3%of less than or equal to 3.0%. If the fair value of MSRs in any of the note interest rate pools is below the carrying value of the MSRs for that pool, impairment is recognized to the extent of the difference between the estimated fair value and the carrying value including the existing valuation allowance forof that pool.

 

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Management periodically reviews the various impairment strata to determine whether the fair value of the impaired MSRs in a given stratum is likely to recover. When management deems 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 is charged to the valuation allowance.

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Both amortization and changes in the amount of the MSR valuation allowance are 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.

 

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 in the consolidated statements of income.

 

Furniture, Fixtures, Equipment and Building Improvements

 

Furniture, fixtures, equipment and building improvements are stated at historical cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight‑line method over the estimated useful lives of the various classes of assets, which range from five to seven years for furniture and equipment and the lesser of the asset’s estimated useful life or the remaining lease term for fixtures and building improvements.

 

Capitalized Software

 

The Company capitalizes certain consulting, payroll, and payroll‑related costs related to computer software developed for internal use,use. Once development is complete and subsequentlythe software is placed in service, the Company amortizes suchthe capitalized costs over a period of five years using the straight‑line method.

 

The Company also periodically assesses long‑lived assets including capitalized software for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. If management identifies an indicator of impairment, it assesses recoverability by comparing the carrying amount of the asset to the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset. An impairment loss is recognized when the carrying amount is not recoverable and is measured as the excess of carrying value over fair value. No such impairment was recorded during the three years ended December 31, 2014.

Restricted Cash

Restricted cash represents deposits that serve as collateral for various agreements the Company has entered into, such as derivative margin account agreements. Restricted cash is included in Other assets in the Company’s consolidated balance sheets. Management classifies restricted cash as a “Level 1” fair value financial statement item.2016.

 

Mortgage Loans Sold Under Agreements to Repurchase

The carrying value of mortgage loans sold under agreements to repurchase is based on the accrued cost of the agreements. The costs of creating the facilities underlying the agreements are recognized as deferred charges in Other assets and amortized to Interest expense over the term of the borrowing facility.

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 of the underlying MSRs. This excess is referred to as the excess servicing spread (“ESS”).  ESS is carried at its fair value. Changes in fair value are recognized in current period income in Amortization, Impairment and Change in Fair Value of Mortgage Servicing Rights.  

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 used to measure MSRs except that certain inputs relating to the cost to service the loans underlying the MSR and certain ancillary income are not included as these cash flows do not accrue to the holder of the ESS. The Company categorizes ESS as a “Level 3” financial statement item.

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Loans Eligible for Repurchase

 

The terms of the Ginnie Mae MBS program allow, but do not require, the Company to repurchase mortgage loans when the borrower has made no payments for three consecutive months. As a result of this right, the Company recordsrecognizes the mortgage loans in LoansMortgage loans eligible for repurchase at their unpaid principal balances and records a corresponding liability in Liability for mortgage loans eligible for repurchase on its consolidated balance sheet.sheets.

Margin Deposits

Margin deposits represents deposits that serve as collateral for various agreements the Company has entered into, such as derivative contracts and certain repurchase agreements. Margin deposits are included in Other assets in the Company’s consolidated balance sheets.

Borrowings

The carrying value 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.

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Excess Servicing Spread Financing at Fair Value

The Company finances certain of its purchases of Agency MSRs through the sale to PMT of the right to receive the excess of the servicing fee rate over a specified rate of the underlying MSRs. This excess is referred to as the ESS.  ESS is carried at its fair value. Changes in fair value are recognized in current period income in Change in fair value of excess servicing spread payable to PennyMac Mortgage Investment Trust.  

Interest expense for ESS is accrued using the interest method based upon the expected cash flows from the ESS through the expected life of the underlying mortgage loans.

 

Liability for Losses Under Representations and Warranties

 

The Company provides for its estimate of the losses that it expects to incur in the future as a result of its breach of the representations and warranties providedthat it provides to the purchasers and insurers of the mortgage loans the Companyit has sold. The Company’s agreements with the Agencies and other investors include representations and warranties related to the mortgage loans the Company sells to the Agencies.Agencies and other investors. The representations and warranties require adherence to Agency and other investor origination and underwriting guidelines, including but not limited to the validity of the lien securing the mortgage loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law.

 

In the event of a breach of its representations and warranties, the Company may be required to either repurchase the mortgage loans with the identified defects or indemnify the investor or insurer for any losses.insurer. In such cases, the Company bears any subsequent credit loss on the mortgage loans. The Company’s credit loss may be reduced by any recourse it has tomay realize from correspondent lendersmortgage 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 lender.

The method used to estimate the Company’s losses on representations and warranties is a function of estimated future defaults,mortgage loan repurchase rates, the Company’s estimate of the severity of loss in the event of defaults and the probability of reimbursement by the correspondent loan seller. The Company establishes a liability at the time loans are sold and reviews its liability estimate on a periodic basis.sellers, through PMT.

 

The Company includesrecords a provision for losses relating to the representations and warranties it makes as part of its mortgage loan sale transactions. The method used to estimate the liability for representations and warranties is a function of the representations and warranties given and considers a combination of factors, including, but not limited to, estimated future defaults and mortgage loan repurchase rates, the potentialestimated severity of loss in the event of default and the probability of reimbursement by the correspondent mortgage loan seller. The Company establishes a liability at the time mortgage loans are sold and periodically updates its liability estimate. The level of the liability estimatefor representations and warranties is reviewed and approved by the Company’s management credit committee.

 

The level of the liability for losses on representations and warranties is difficult to estimate and requires considerable management judgment. The level of mortgage loan repurchase losses is dependent on economic factors, investor loss mitigationrepurchase demand or insurer claim denial strategies, the Company’s ability to recover any losses inherent in repurchased loans from the correspondent lenders and other external conditions that may change over the lives of the underlying mortgage loans. As economic fundamentals change, as investor and Agency evaluation of their loss mitigation strategies (including claims under representations and warranties) change and as the mortgage market and general economic conditions affect the Company’s correspondent lenders, the level of ensuing losses will change. As a result of these changes, the Company may be required to adjust the estimate of its liability for representations and warranties. Such an adjustment may be material to the Company’s financial condition and results of operations. The Company did not record any adjustments to previously recorded liabilities for representations and warranties during any of the periods presented.

The Company’s representations and warranties are generally not subject to stated limits of exposure. However, managementthe Company believes that the current unpaid principal balance (“UPB”) of mortgage loans sold by the Company to date represents the maximum exposure to repurchases related to representations and warranties. ManagementThe Company believes the amount and range of reasonably possible losses in relation to the recorded liability is not material to the Company’sits financial condition or results of operations.income.

 

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Mortgage Loan Servicing Fees

 

LoanMortgage loan servicing fees and other remuneration are received by the Company for servicing residential mortgage loans. LoanMortgage loan servicing fees are recorded net of Agency guarantee fees paid by the Company. LoanMortgage loan servicing fees are recognized as earned over the life of the mortgage loans in the servicing portfolio.

 

Stock‑Based Compensation

 

The Company’s 2013 Equity Incentive Plan provides for awards of nonstatutory and incentive stock options, (“Stock Options”), time‑based restricted stock units, performance‑based restricted stock units, stock appreciation rights, performance units

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and stock grants. The Company establishes the cost of its share-based awards at the awards’ fair values at the grant date of the awards. The Company estimates the fair value of the stock options, time‑based restricted stock units and performance‑based restricted stock units awarded with reference to the fair value of its underlying common stock on the date of the award. The Company estimates the fair value of its stock option awards with reference to the expected volatility of its shares of common stock and risk-free interest rate for the period that exercisable stock options are expected to be outstanding.

 

Compensation costs are fixed, except for performance‑based restricted stock units, as of the award date as all grantees are employees of PennyMac or directors of the Company. The cost of performance share 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 time‑based restricted stock unitbased awards to compensation expense over the vesting period using the graded vesting method. The Company amortizes performance‑based restricted stock unit awards on the straight‑line basis over the vesting period. 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, the Company expects to benefit from amortization and other tax deductions due to an increaseincreases in the tax basis of PennyMac’s assets from the exchange of PennyMac Class A units. Those deductions will be allocated to the Company and will be taken into account in reporting the Company’s taxable income. The Company has entered into an agreement with the unitholders of PennyMac that will provide for the additional payment by the Company to exchanging unitholders of PennyMac equal to 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that PFSI realizes due to (i) increases in tax basis resulting from exchanges of the then‑existing unitholders and (ii) certain other tax benefits related to PFSI entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.

 

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.

 

Variable Interest Held in Unconsolidated Variable Interest Entities

 

A Variable Interest Entity (“VIE”) is an entity having either a total equity investment that is insufficient to finance its activities without additional subordinated financial support or equity investors at risk that lack the ability to control the entity’s activities. Variable interests are investments or other interests that will absorb portions of a VIE’s expected losses or receive portions of the VIE’s expected residual returns.

PFSI consolidates the assets and liabilities of VIEs of which the Company is the primary beneficiary. The primary beneficiary is the party that has both the power to direct the activities that most significantly impact the VIE and holds a variable interest that could potentially be significant to the VIE. To determine whether a variable interest the Company holds could potentially be significant to the VIE, the Company considers both quantitative and qualitative factors regarding the nature, size and form of its involvement with the VIE. The Company assesses whether it is the primary beneficiary of a VIE on an ongoing basis.

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PMOFA is athe general partner inof the Master Fund. The Master Fund wholly owns PennyMac Mortgage Co. Funding, LLC (“Funding, LLC”), and PennyMac Mortgage Co. Funding II, LLC (“Funding II, LLC)and PennyMac Mortgage Co, LLC (“Mortgage Co”).LLC.  Funding LLC and Funding II, LLC are eachis the majority interest holder in PennyMac Loan Trust 2010‑2015‑NPL1 PennyMac Loan Trust 2011‑NPL1, PennyMac REO 2011‑NPL1 and PNMAC

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Mortgage Co (F1), LLC (the “Trusts”“Trust”), which in the case of the first entity holds the mortgage loans for Funding LLC and in the case of the latter two entities hold the mortgage loans for Funding II, LLC.

 

PLS provides mortgage loan servicing tofor the Trustsmortgage loans held by the Trust as well as tofor mortgage loans held by the Mortgage Co. The related party group constituting the Company and its affiliates (including PMOFA) has an equity interest in the Master Fund, the ultimate Parentparent of the Trusts,Trust, Mortgage Co Funding, LLC and Funding, II, LLC. The direct equity holders in the Trusts,Trust, Mortgage Co Funding, LLC and Funding, II, LLC, however, do not have power to direct operationsthe activities of the respective entities and as such, both the TrustsTrust and Mortgage Co are considered to be variable interest entities (“VIEs”)VIEs as defined in the Consolidations topic of the Codification.

 

The Company is not the primary beneficiary in these VIEs, given it does not represent the enterprise within the related party group that is most closely associated with these VIEs and, as such, the Company does not consolidate these VIEs. Exposure ofto loss toof the related party group from the unconsolidated VIEs is limited to the contributed capital of the related party group in the Master Fund totaling $2,000 which represents the general partnership interest held by PMOFA in the Master Fund.

 

Note 4—Transactions with Affiliates

PennyMac Mortgage Investment Trust

Transactions with PMT

 

CorrespondentOperating Activities

Mortgage Loan Production Activities and MSR Recapture

 

Before February 1, 2013, PMT paid PennyMacSeptember 12, 2016, the Company was entitled to a fulfillment fee of 0.50% of the UPB of mortgage loans sold to non‑affiliates where PMT is approved or licensed to sell to such non‑affiliate. Effective February 1, 2013, the mortgage banking and warehouse services agreement provides for a fulfillment fee paid to the Company based on the type of mortgage loan that PMT acquires. The fulfillment fee isacquires and equal to a percentage of the UPB of such mortgage loans purchased by PMT, with the addition of potential fee rate discounts applicable to PMT’s monthly purchase volume in excess of designated thresholds.loan. The Company has also agreed to provide such services exclusively for PMT’s benefit, and the Company and its affiliates are prohibited from providing such services for any other third party.

Presently, the applicable fulfillment fee percentages arewere (i) 0.50% for conventional mortgage loans, (ii) 0.88% for loans saleablesold in accordance with the Ginnie Mae Mortgage‑Backed Securities Guide, (iii) 0.80% for the U.S. Department of the Treasury and HUD’s Home Affordable Refinance Program (“HARP”) mortgage loans with a loan‑to‑value ratio of 105% or less, (iv) 1.20% for HARP mortgage loans with a loan‑to‑value ratio of more than 105%, and (v)(iii) 0.50% for all other mortgage loans not contemplated above; provided, however, that the Company may,was permitted, in its sole discretion, to reduce the amount of the applicable fulfillment fee and credit the amount of such reduction to the reimbursement otherwise due as described below. This reduction maywas only be credited to the reimbursement applicable to the month in which the related mortgage loan was funded.

 

InEffective September 12, 2016, the event that PMT purchasesapplicable fulfillment fee percentages are (i) 0.35% for mortgage loans with an UPB in any month totaling more than $2.5 billionsold or delivered to Fannie Mae or Freddie Mac, and less than $5 billion,(ii) 0.85% for all other mortgage loans; provided however, that no fulfillment fee shall be due or payable to the Company has agreedwith respect to discount the amount of such fulfillment fees by reimbursing PMT an amount equal to the product of (i) 0.025%, (ii) the amount of UPB in excess of $2.5 billion and (iii) the percentage of the total UPB relating toany Ginnie Mae mortgage loans for which the Company collected fulfillment fees in such month. In the event PMT purchases mortgage loans with an total UPB in any month greater than $5 billion, the Company has agreed to further discount the amount of fulfillment fees by reimbursing PMT an amount equal to the product of (i) 0.05%, (ii) the amount of UPB in excess of $5 billion and (iii) the percentage of the total UPB relating to mortgage loans for which the Company collected fulfillment fees in such month.

loans. PMT does not hold the Ginnie Mae approval required to issue Ginnie Mae MBS and act as a servicer. Accordingly, under the mortgage banking and warehouse servicesMBS agreement, the Company currently purchases mortgage loans saleableunderwritten in accordance with the Ginnie Mae Mortgage‑BackedMortgage-Backed Securities Guide “as is” and without recourse of any kind tofrom PMT at itsPMT’s cost less fees collected by PMT from the seller,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 three basis points.calendar days mortgage loans are held by PMT prior to purchase by the Company.

 

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In consideration for the mortgage banking services provided by the Company with respect to PMT’s acquisition of mortgage loans under PLS’sthe Company’s early purchase program, theThe Company is entitled to fees accruing (i) accruing at a rate equal to $25,000$1,500 per year per early purchase facility administered by the Company, and (ii) in the amount of $50 for each mortgage loan PMT acquires. In consideration for the warehouse services provided by the Company with respect to mortgage loans that PMT finances for its warehouse lending clients, with respect to each facility, the Company is entitled to fees (i) accruing at a rate equal to $25,000 per year, and (ii) in the amount of $50$35 for each mortgage loan that PMT financesacquires thereunder. Where PMT has entered into both

Pursuant to the terms of an early purchaseamended and restated MSR recapture agreement, and a warehouse lending agreement with the same client,effective September 12, 2016, if the Company shall only be entitledrefinances through its consumer direct lending business mortgage loans for which PMT previously held the MSRs, the Company is generally required to transfer and convey to one $25,000 per year fee and,of PMT’s wholly‑owned subsidiaries without cost to PMT, the MSRs with respect to anynew mortgage loanloans originated in those refinancings (or, under certain circumstances, other mortgage loans) that becomes subject to both such agreements, only one $50 perhave an aggregate UPB that is not less than 30% of the aggregate UPB of all the mortgage loan fee.loans so originated.

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The termWhere the fair value of the mortgage banking and warehouse servicesaggregate MSRs 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 value instead of transferring such MSRs. The MSR recapture agreement expires, unless terminated earlier in accordance with the agreement, on February 1, 2017,September 12, 2020, subject to automatic renewal for additional 18‑month18-month periods, unless terminated earlier in accordance with the terms of the agreement.

 

Following is a summary of mortgage lending activityloan production activities and MSR recapture between the Company and PMT:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

   

2014

   

2013

   

2012

 

 

 

(in thousands)

 

Fulfillment fee revenue

    

$

48,719 

    

$

79,712 

    

$

62,906 

 

Unpaid principal balance of loans fulfilled for PennyMac Mortgage Investment Trust

 

$

11,476,448 

 

$

15,225,153 

 

$

13,028,375 

 

 

 

 

 

 

 

 

 

 

 

 

Sourcing fees paid

 

$

4,676 

 

$

4,611 

 

$

2,505 

 

Fair value of loans purchased from PennyMac Mortgage Investment Trust

 

$

16,431,338 

 

$

16,113,806 

 

$

8,864,264 

 

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

 

$

8,081 

 

$

12,339 

 

$

3,622 

 

MSR recapture recognized

 

$

 

$

709 

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

 

2016

   

2015

   

2014

 

 

 

(in thousands)

 

Mortgage servicing rights and excess servicing spread recapture incurred included in Net gains on mortgage loans for sale at fair value

 

$

8,092

 

$

7,836

 

$

7,837

 

 

 

 

 

 

 

 

 

 

 

 

Fulfillment fee revenue

 

$

86,465

    

$

58,607

    

$

48,719

 

Unpaid principal balance of mortgage loans fulfilled for PMT

 

$

23,188,386

 

$

14,014,603

 

$

11,476,448

 

 

 

 

 

 

 

 

 

 

 

 

Sourcing fees paid to PMT

 

$

11,976

 

$

8,966

 

$

4,676

 

Unpaid principal balance of mortgage loans purchased from PMT

 

$

39,908,163

 

$

29,867,580

 

$

16,431,338

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from sale of mortgage loans held for sale to PMT

 

$

21,541

 

$

28,445

 

$

8,081

 

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

 

$

6,690

 

$

4,390

 

$

2,080

 

Early purchase program fees earned from PMT included in Mortgage loan servicing fees

 

$

30

 

$

 —

 

$

 —

 

 

Mortgage Loan Servicing

 

The Company has a loan servicing agreement with PMT. Before February 1, 2013, the servicing fee rates were based on the risk characteristics of the mortgage loans serviced and total servicing compensation was established at levels that management believed were competitive with those charged by other servicers or specialty servicers, as applicable.

·

Servicing fee rates for nonperforming loans ranged between 50 and 100 basis points per year on the UPB of the mortgage loans serviced on PMT’s behalf. PennyMac was also entitled to certain customary market‑based fees and charges, including boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and late charges, as well as interest on funds on deposit in custodial accounts. In the event PennyMac either effected a refinancing of a loan on PMT’s behalf and not through a third party lender and the resulting loan was readily saleable, or originated a loan to facilitate the disposition of real estate that PMT had acquired in settlement of a loan, PennyMac was entitled to receive from PMT market‑based fees and compensation.

·

For mortgage loans serviced by PMT as a result of acquisitions and sales with servicing rights retained in connection with PMT’s correspondent production business, PennyMac was entitled to base subservicing fees and other customary market‑based fees and charges as described above.

Effective February 1, 2013, theThe servicing agreement was amended to provideprovides for servicing fees payable to the Company that changed from being based on a percentage of the loan’s UPB to fixed per‑loan monthly amounts based on the delinquency, bankruptcy and/or foreclosure status of the serviced mortgage loan or the REO. The Company also remains entitled to customary ancillary income and market-based fees and charges, including boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and late charges relating to mortgage loans it services for the PMT. The servicing agreement was amended and restated as of September 12, 2016; however, the fee structure was not amended in any material respect.

·

The base servicing fee rates for distressed whole mortgage loans range from $30 per month for current loans up to $100 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 charged based onoutsourced 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.

·

The base servicing fees for non-distressed mortgage loans are calculated through a monthly per‑loanper-loan dollar amount, with the actual dollar amount for each loan based on whether the delinquency, bankruptcy and/or

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foreclosure status of suchmortgage loan is a fixed-rate or the related underlying real estate. Presently, theadjustable-rate loan. The base servicing fee rates for distressed whole mortgage loans range from $30are $7.50 per month and $8.50 per month for currentfixed-rate loans up to $125 per month for mortgageand adjustable-rate loans, that are severely delinquent and in foreclosure.respectively.

·

The base servicing fee ratesCompany is also entitled to certain activity-based fees for non‑distressed whole mortgage loans subserviced by the Company on PMT’s behalfthat are also calculated through a monthly per‑loan dollar amount, with the actual dollar amount for each mortgage loan based on whether the mortgage loan is a fixed‑rate or adjustable‑rate loan. The base servicing fee rates for mortgage loans subserviced on PMT’s behalf are $7.50 per month for fixed‑rate mortgage loans and $8.50 per month for adjustable rate mortgage loans. To the extent that these mortgage loans become delinquent, the Company is entitled to an additional servicing fee per mortgage loan falling within a range of $10 to $75 per monthcharged based on the delinquency, bankruptcyachievement of certain events. These fees range from 0.50% for a streamline modification to 1.50% for a liquidation and foreclosure status$500 for a deed-in-lieu of the mortgage loanforeclosure. The Company is not entitled to earn more than one liquidation fee, reperformance fee or the related underlying real estate.modification fee in any 18-month period.

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·

TheBecause PMT has limited employees and 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 because PMT does not have any employees or infrastructure.arrangement. For these services, the Company receives a supplemental servicing fee of $25 per month for each distressed whole mortgage loan and $3.25 per month for each non‑distressed subserviced mortgage loan. With respect to non‑distressed subserviced mortgage loans, the supplemental fee is subject to a cap of $700,000 per quarter. The Company is also entitled to reimbursement for all customary, good faith reasonable and necessary out‑of‑pocketout-of-pocket expenses incurred by the Company in performance of its servicing obligations.

·

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 the real estate acquired by PMT in settlement of a mortgage loan, the Company is entitled to receive from PMT market-based fees and compensation consistent with pricing and terms the Company offers unaffiliated parties on a retail basis.

·

The  Company on behalf of PMT, currently participates in the Home Affordable Modification Program (“HAMP”) of the U.S. Department of the Treasury and U.S. Department of Housing and Urban Development (“HUD”) (and other similar mortgage loan modification programs). HAMP establishes standard loan modification guidelines for “at risk” homeowners and provides incentive payments to certain participants, including mortgage loan servicers, for achieving modifications and successfully remaining in the program. The mortgage loan servicing agreement entitles the Companyis entitled to retain any incentive payments made to it and to which it is entitled under HAMP; provided, however, that with respect to any such incentive payments paid to the Company under HAMP in connection with a mortgage loan modification for which PMT previously paid the Company a modification fee, the Company shallis required to reimburse PMT an amount equal to the incentive payments.

 

The Company also remains entitledservicing agreement expires on September 12, 2020, subject to market‑based fees and charges including boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and late charges relating to loans it servicesautomatic renewal for PMT.additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

Year ended December 31, 

 

2014

 

2013

 

2012

 

 

2016

   

2015

 

2014

 

(in thousands)

 

 

(in thousands)

Loan servicing fees relating to PMT:

 

 

 

 

 

 

 

 

 

 

Mortgage loans acquired for sale at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Base and supplemental

    

$

103 

    

$

262 

    

$

204 

 

    

$

330

    

$

260

 

$

103

Activity-based

 

 

149 

 

 

300 

 

 

 —

 

 

 

733

 

 

371

 

 

149

 

 

252 

 

 

562 

 

 

204 

 

 

 

1,063

 

 

631

 

 

252

Mortgage loans at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Base and supplemental

 

 

18,953 

 

 

16,458 

 

 

14,128 

 

 

 

11,078

 

 

16,123

 

 

18,953

Activity-based

 

 

19,608 

 

 

11,814 

 

 

4,276 

 

 

 

18,521

 

 

12,437

 

 

19,608

 

 

38,561 

 

 

28,272 

 

 

18,404 

 

 

 

29,599

 

 

28,560

 

 

38,561

MSRs:

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights:

 

 

 

 

 

 

 

 

 

Base and supplemental

 

 

13,515 

 

 

10,274 

 

 

 —

 

 

 

19,461

 

 

16,911

 

 

13,515

Activity-based

 

 

194 

 

 

305 

 

 

 —

 

 

 

492

 

 

321

 

 

194

 

 

13,709 

 

 

10,579 

 

 

 —

 

 

 

19,953

 

 

17,232

 

 

13,709

 

$

52,522 

 

$

39,413 

 

$

18,608 

 

 

$

50,615

 

$

46,423

 

$

52,522

 

Investment Management FeesActivities

 

Before February 1, 2013, underThe Company has a management agreement PennyMac received a base management fee fromwith PMT. The base management fee was calculated at 1.5% per year of PMT’s shareholders’ equity. The management agreement also provided for a performance incentive fee, which was calculated at 20% per year of the amount by which PMT’s “core earnings,” on a rolling four‑quarter basis and before the incentive fee, exceeded an 8% “hurdle rate” as defined in the management agreement. PennyMac did not earn a performance incentive fee before February 1, 2013.provides that:

 

Effective February 1, 2013, the management agreement was amended to provide 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 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.”

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The performance incentive fee is calculated quarterly and 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 computed in accordance with U.S. GAAP andadjusted for certain other non‑cash charges determined after discussions between the Company and PMT’sPMT��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” starts at zero and is adjusted quarterly. The quarterly adjustment reflects the amount by which the net income (stated as a percentage of return on equity) in that quarter exceeds or falls short of

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the lesser of 8% and the average Fannie Mae 30‑year MBS yield (the “target yield”“Target Yield”) for the four quarters then ended. If the net income is lower than the target yield,Target Yield, the high watermark is increased by the difference. If the net income is higher than the target yield,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,Target Yield, until the net income in excess of the target yieldTarget 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 ina 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.

 

Following is a summary of the management fees earned from PMT:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

   

2014

   

2013

   

2012

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

Management fees:

 

 

 

 

 

 

 

 

 

 

Base

    

$

23,330 

    

$

19,644 

    

$

12,436 

 

Performance incentive

 

 

11,705 

 

 

12,766 

 

 

 —

 

 

 

$

35,035 

 

$

32,410 

 

$

12,436 

 

The term of the management agreement as amended, expires on February 1, 2017,September 12, 2020, subject to automatic renewal for additional 18‑month18-month periods, unless terminated earlier in accordance with the terms of the management agreement.

In the event of termination byof 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 beforeimmediately preceding the date of termination.

 

MSR Recapture AgreementFollowing is a summary of the base management and performance incentive fees earned from PMT:

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

2016

   

2015

 

2014

 

 

(in thousands)

Base management

    

$

20,657

    

$

22,851

 

$

23,330

Performance incentive

 

 

 —

 

 

1,343

 

 

11,705

 

 

$

20,657

 

$

24,194

 

$

35,035

Expense Reimbursement

 

PursuantUnder 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, from and after

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September 12, 2016, the Company shall be reimbursed $120,000 per fiscal quarter, such amount to be reviewed annually and not preclude reimbursement for any other services performed by the Company or its affiliates.

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

The Company received reimbursements from PMT for expenses as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

 

2016

   

2015

   

2014

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Reimbursement of:

 

 

                

    

 

                

    

 

                

 

Common overhead incurred by the Company

 

$

7,898

 

$

10,742

 

$

10,850

 

Expenses incurred on (the Company's) PMT's behalf, net

 

 

(163)

 

 

582

 

 

792

 

 

 

$

7,735

 

$

11,324

 

$

11,642

 

Payments and settlements during the period (1)

 

$

143,542

 

$

99,967

 

$

99,987

 


(1)

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

Conditional Reimbursement of Underwriting Fees

In connection with the IPO of PMT’s common shares on August 4, 2009, the Company entered into an agreement with PMT pursuant to which PMT agreed to reimburse the Company for the $2.9 million payment that it made to the underwriters in such offering if PMT satisfied certain performance measures over a specified period (the “Conditional Reimbursement”). Effective February 1, 2013, the parties amended the terms of the reimbursement agreement to provide for the reimbursement to the Company of the Conditional Reimbursement if PMT is required to pay the Company performance incentive fees under the management agreement at a rate of $10 in reimbursement for every $100 of performance incentive fees earned. The reimbursement of the Conditional Reimbursement is subject to a maximum reimbursement in any particular 12 month period of $1.0 million and the maximum amount that may be reimbursed under the agreement is $2.9 million. The Company received Conditional Reimbursements totaling $0, $237,000 and $651,000 during the years ended December 31, 2016, 2015 and 2014, respectively.

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. The term of the reimbursement agreement expires on February 1, 2019.

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Amounts due from and payable to PMT are summarized below:

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

2016

   

2015

 

 

 

(in thousands)

 

Receivable from PMT:

 

 

 

 

 

 

 

Servicing fees

 

$

5,465

 

$

3,682

 

Management fees

 

 

5,081

 

 

5,670

 

Correspondent production fees

 

 

2,371

 

 

2,729

 

Fulfillment fees

 

 

1,300

 

 

1,082

 

Allocated expenses and expenses incurred on PMT's behalf

 

 

1,046

 

 

4,490

 

Conditional Reimbursement

 

 

900

 

 

900

 

Interest on financing receivable

 

 

253

 

 

412

 

 

 

$

16,416

 

$

18,965

 

Payable to PMT:

 

 

 

 

 

 

 

Deposits made by PMT to fund servicing advances

 

$

162,945

 

$

153,573

 

Mortgage servicing rights recapture payable

 

 

707

 

 

781

 

Other

 

 

6,384

 

 

8,025

 

 

 

$

170,036

 

$

162,379

 

Investing Activities

Financing Receivable from PMT

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

In connection with the GNMA MSR Facility, PLS pledges and/or sells to the Issuer Trust participation certificates representing beneficial interests in MSRs and ESS pursuant to the terms of the PC Repurchase Agreement. In return, the Issuer Trust (a) has issued to PLS, pursuant to the terms of an indenture, the Series 2016-MSRVF1 Variable Funding Note, dated December 19, 2016, known as the “PNMAC GMSR ISSUER TRUST MSR Collateralized Notes, Series 2016-MSRVF1” (the “VFN”), and (b) 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 MSR recapture agreement, as amended, ifpari passu basis by the Company refinances through its consumer direct business mortgage loans for which PMT previously heldparticipation certificates relating to the MSRs the Company is generally required to transfer and convey to one of PMT’s wholly‑owned subsidiaries, without cost to PMT, the MSRs with respect to new mortgage loans originated in those refinancings (or, under certain circumstances, other mortgage loans) that have a total UPB that is not less than 30%ESS. The maximum principal balance of the total UPB of all the mortgage loans so originated.VFN is $1,000,000,000.

 

WhereThe principal amount paid by PLS for the fairparticipation certificates under the PMH Repurchase Agreement is based upon a percentage of the market value of the aggregateunderlying 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.

Prior to the Company’s entry into the PMH Repurchase Agreement and PC Repurchase Agreement in connection with the GNMA MSR facility, the Company was a party to a repurchase agreement with Credit Suisse First Boston Mortgage Capital LLC (“CSFB”) (the “MSR Repo”), pursuant to which it financed Ginnie Mae MSRs and servicing advance receivables and pledged to be transferredCSFB all of its rights and interests in any Ginnie Mae MSRs it owned or

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acquired, and a separate acknowledgement agreement with respect thereto, by and among Ginnie Mae, CSFB and the Company.

In connection with the MSR Repo described above, the Company and PMT entered into an underlying loan and security agreement, dated as of April 30, 2015, pursuant to which PMT was able to borrow up to $150 million from the Company for the applicable month is less than $200,000,purpose of financing ESS (the “Underlying LSA”). In order to secure its borrowings, PMT pledged its ESS to the Company may,under the Underlying LSA and the Company, in turn, re-pledged such ESS to CSFB under the MSR Repo. The principal amount of the borrowings under the Underlying LSA was based upon a percentage of the market value of the ESS pledged by PMT, subject to the $150 million sublimit described above. Pursuant to the Underlying LSA, PMT granted to the Company a security interest in all of its right, title and interest in, to and under the ESS pledged to secure the borrowings.

The Company and PMT agreed in connection with the Underlying LSA that PMT was required to repay the Company the principal amount of borrowings plus accrued interest to the date of such repayment, and the Company was required to repay CSFB the corresponding amount under the MSR Repo. Interest accrued on PMT’s note relating to the Underlying LSA at its option,a rate based on CSFB’s cost of funds under the MSR Repo. PMT was also required to pay cash to PMTthe Company a fee for the structuring of the Underlying LSA in an amount equal to such fair market value insteadthe portion of transferring such MSRs.the corresponding fee paid by the Company to CSFB and allocable to the $150 million relating to the ESS financing. The note receivable was replaced by the PMH Repurchase Agreement upon the closing of the GNMA MSR recapture agreement expires, unless terminated earlier in accordance with the agreement, on February 1, 2017, subject to automatic renewal for additional 18‑month periods. The Company recorded MSR recapture totaling $9,000 and $709,000 for the years ended December 31, 2014 and 2013, respectively, as a component of Gain on mortgage loans held for sale.facility.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

    

2016

    

2015

 

2014

 

 

 

(in thousands)

 

Repurchase agreement with PennyMac Mortgage Investment Trust:

 

 

 

 

 

 

 

 

 

 

Activity during the year:

 

 

 

 

 

 

 

 

 

 

Refinancing of note receivable from PennyMac Mortgage Investment Trust

 

$

150,000

 

$

 —

 

$

 —

 

Interest income

 

$

253

 

$

 —

 

$

 —

 

Balance at end of year

 

$

150,000

 

$

 —

 

$

 —

 

Note receivable from PennyMac Mortgage Investment Trust:

 

 

 

 

 

 

 

 

 

 

Activity during the year:

 

 

 

 

 

 

 

 

 

 

Advances to PennyMac Mortgage Investment Trust

 

$

 —

 

$

168,546

 

$

 —

 

Repayments and refinancing with repurchase agreement from PennyMac Mortgage Investment Trust

 

$

(150,000)

 

$

(18,546)

 

$

 —

 

Interest income

 

$

7,577

 

$

3,343

 

$

 —

 

Balance at end of year

 

$

 —

 

$

150,000

 

$

 —

 

Common shares of beneficial interest of PennyMac Mortgage Investment Trust:

 

 

 

 

 

 

 

 

 

 

Activity during the year:

 

 

 

 

 

 

 

 

 

 

Dividends received from PennyMac Mortgage Investment Trust

 

$

141

 

$

207

 

$

134

 

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

 

 

83

 

 

(437)

 

 

(140)

 

 

 

$

224

 

$

(230)

 

$

(6)

 

Balance at end of year:

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

1,228

 

$

1,145

 

 

 

 

Number of shares

 

 

75

 

 

75

 

 

 

 

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Financing Activities

Spread Acquisition and MSR Servicing Agreements

 

Effective February 1, 2013, the Company entered into a master spread acquisition and MSR servicing agreement (the “2/1/13 Spread Acquisition Agreement”), pursuant to which it may sellsold to PMT or one of its wholly ownedwholly-owned subsidiaries the rights to receive certain ESS from MSRs acquired by the Company from banks and other third party financial institutions. The Company iswas generally required to service or subservice the related mortgage loans for the applicable agencyAgency or investor. The terms of each transaction under the 2/1/13 Spread Acquisition Agreement arewere subject to the terms thereof, as modified and supplemented by the terms of a confirmation executed in connection with such transaction.

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To the extent the Company refinancesrefinanced any of the mortgage loans relating to the ESS sold to PMT, the 2/1/13 Spread Acquisition Agreement containscontained recapture provisions requiring that the Company transfer to PMT, at no cost, the ESS relating to a certain percentage of the UPB of the newly originated mortgage loans. To the extent the fair value of the aggregate ESS to be transferred for the applicable month iswas less than $200,000, the Company may,was, at its option, permitted to pay cash to PMT in an amount equal to such fair value instead of transferring such ESS.


On December 30, 2013,February 29, 2016, the Company entered into a second master spread acquisition and MSR servicing agreement with PMT (the “12/30/13 Spread Acquisition Agreement”). The terms ofparties terminated the 12/30/2/1/13 Spread Acquisition Agreement are substantially similar toand all amendments thereto. In connection with the termstermination of the 2/1/13 Spread Acquisition Agreement, except that the Company only intends to sell ESS relating to Ginnie Mae MSRs under the 12/30/13 Spread Acquisition Agreement.

To the extent the Company refinances any of the mortgage loans relating to the ESS it sells to PMT, the 12/30/13 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 UPB of the newly originated mortgage loans. However, under the 12/30/13 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 UPB 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 UPB of the modified mortgage loans, the 12/30/13 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 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 value instead of transferring such ESS.

In connection with the Company’s entry into the 12/30/13 Spread Acquisition Agreement, it was also required to amend the terms of its loan and security agreement (the “LSA”) with Credit Suisse First Boston Mortgage Capital LLC (“CSFB”), pursuant to which the Company pledged to CSFBPLS reacquired from PMH all of its rightsright, title and interestsinterest in the Ginnie Mae MSRs it owns or acquires, and a separate acknowledgement agreement with respect thereto, by and among Ginnie Mae, CSFB and the Company. Separately, as a condition to permitting the Company to transfer to PMT the ESS relating to a portionall of the Company’s pledged GinnieFannie Mae MSRs, CSFB required PMTESS previously sold by PLS to enter into a SecurityPMH and Subordination Agreement (the “Security Agreement”), pursuantthen subject to which PMT pledged to CSFB its rights under the 12/30/13 Spread Acquisition Agreement and its interest in any ESS purchased thereunder. CSFB’s lien on the ESS remains subordinate to the rights and interests of Ginnie Mae pursuant to the provisions of the 12/30/13 Spread Acquisition Agreement and the terms of the acknowledgement agreement.

The Security Agreement permits CSFB to liquidate PMT’s ESS along with the related MSRs to the extent there exists an event of default under the LSA, and it contains certain trigger events, including breaches of representations, warranties or covenants and defaults under other of PMT’s credit facilities, that would require the Company to either (i) repay in full the outstanding loan amount under the LSA or (ii) repurchase the ESS from PMT at fair value. To the extent the Company is unable to repay the loan under the LSA or repurchase the ESS, an event of default would exist under the LSA, thereby entitling CSFB to liquidate the ESS and the related MSRs. In the event the ESS is liquidated as a result of certain actions or inactions of the Company, PMT generally would be entitled to seek indemnity from the Company under the 12/30/such 2/1/13 Spread Acquisition Agreement.

 

On December 19, 2014, the Company entered into a thirdsecond master spread acquisition and MSR servicing agreement with PMT (the “12/19/14 Spread Acquisition Agreement”). The terms of the 12/19/14 Spread Acquisition Agreement are substantially similar to the terms of the 2/1/13 Spread Acquisition Agreement, except that the Company only intends to sell ESS relating to Freddie Mac MSRs under the 12/19/14 Spread Acquisition Agreement.

 

To the extent the Company refinances any of the mortgage loans relating to the ESS it sells to PMT,  the 12/19/14 Spread  Acquisition Agreement also contains recapture provisions requiring that the Company transferstransfer to PMT,  at  no cost,  the ESS relating to a  certain percentage of the UPB of the newly originated mortgage loans.  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.

On February 29, 2016, PLS also reacquired from PMT all of its right, title and interest in and to all of the Freddie Mac ESS previously sold by PLS to PMT and then subject to such 12/19/14 Spread Acquisition Agreement. The 12/19/14 Spread Acquisition Agreement remains in full force and effect.

On December 19, 2016, the Company amended and restated a third master spread acquisition and MSR servicing agreement with PMT (the “12/19/16 Spread Acquisition Agreement”). The terms of the 12/19/16 Spread Acquisition Agreement are substantially similar to the terms of the 2/1/13 Spread Acquisition Agreement and the 12/19/14 Spread Acquisition Agreement, except that the Company only intends to sell ESS relating to Ginnie Mae MSRs under the 12/19/16 Spread Acquisition Agreement. Pursuant to the 12/19/16 Spread Acquisition Agreement, 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 12/19/16 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 12/19/16 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

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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 12/19/16 Spread Acquisition Agreement contains provisions that require the Company to transfer additional ESS or cash in the amount of such shortfall. To the extent the fair market value of the aggregate ESS to be transferred for the applicable month is less than $200,000, the Company may, at its option, wire cash to PMT in an amount equal to such fair market value in lieu of transferring such ESS.

 

Following is a summary of financing and mortgage loan sourcing activity between the Company and PMT:

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

   

2014

   

2013

 

 

 

(in thousands)

 

Issuance of excess servicing spread

       

$

99,728 

 

$

139,028 

 

Repayments of excess servicing spread

 

$

(39,256)

 

$

(4,076)

 

Change in fair value of excess servicing spread

 

$

(28,663)

 

$

2,423 

 

Interest expense from excess servicing spread

 

$

13,292 

 

$

1,091 

 

Excess servicing spread recapture recognized

 

$

7,828 

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

2016

   

2015

   

2014

 

 

(in thousands)

Excess servicing spread financing:

 

 

 

 

 

 

 

 

 

Issuance:

 

 

 

 

 

 

 

 

 

Cash

 

$

 -

 

$

271,554

 

$

99,728

Pursuant to recapture agreement

 

$

6,603

 

$

6,728

 

 

7,342

Repayment

 

$

(69,992)

 

$

(78,578)

 

$

(39,256)

Settlement

 

$

(59,045)

 

$

 -

 

$

 -

Change in fair value

 

$

(23,923)

 

$

(3,810)

 

$

(28,663)

Interest expense

 

$

22,601

 

$

25,365

 

$

13,292

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

 

$

6,529

 

$

7,049

 

$

7,828

 

Other Transactions

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Table of Contents

Investment Funds

 

In connectionThe Company has investment management agreements with the IPO of PMT’s common shares on August 4, 2009, the Company entered into an agreement with PMTInvestment Funds pursuant to which PMT agreedit receives management fees consisting of base management fees and carried interest. The management fees are based on the lesser of the funds’ net asset values or aggregate capital contributions. The base management fees accrue at annual rates ranging from 1.5% to reimburse PennyMac for2.0% of the $2.9 million paymentapplicable amounts on which they are based.

The Carried Interest that it madethe Company recognizes from the Investment Funds is determined by the Investment Funds’ performance and its contractual rights to share in the Investments Funds’ returns in excess of the preferred returns, if any, accruing to the underwritersfunds’ investors. The Company recognizes Carried Interest as a participation in such offering (the “Conditional Reimbursement”) if PMT satisfied certain performance measures overthe profits in the Investment Funds after the investors in the Investment Funds have achieved a preferred return as defined in the fund agreements. After the investors have achieved the preferred returns specified period of time. Effective February 1, 2013,in the parties amended the terms of the reimbursement agreement to provide for the reimbursementrespective fund agreements, a “catch up” return accrues to the Company until it receives a specified percentage of the Conditional Reimbursement if PMTpreferred return. Thereafter, the Company participates in future returns in excess of the preferred return at the rates specified in the fund agreements.

The amount of the Carried Interest that the Company receives depends on the Investment Funds’ future performance. As a result, the amount of Carried Interest recorded by the Company at period end is subject to adjustment based on future results of the Investment Funds and may be reduced as a result of subsequent performance. However, the Company is not required to pay guaranteed returns to the Company performance incentive fees underInvestment Funds and the management agreement at a rateamount of $10Carried Interest will only be reversed to the extent of amounts previously recognized.

The Investment Funds will continue in reimbursement for every $100 of performance incentive fees earned. The reimbursement of the Conditional Reimbursement isexistence through December 31, 2017, subject to a maximum reimbursement in any particular 12 month period of $1.0 million andtwo one-year extensions at the maximum amount that may be reimbursed under the agreement is $2.9 million. The Company received payments from PMT totaling $651,000 and $944,000 during the years ended December 31, 2014 and 2013, respectively. No payments were received from PMT during the year ended December 31, 2012.

In the event the 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. The term of the reimbursement agreement expires on February 1, 2019.

PMT reimburses the Company for other expenses, including common overhead expenses incurred on its behalf by the Company,Company’s discretion, in accordance with the terms of its management agreement. Such amounts are summarized below:the limited liability company and limited partnership agreements that govern the Investment Funds.

 

The Company also has loan servicing agreements with the Investment Funds. The loan servicing to be provided by the Company under the loan servicing agreements with the Investment Funds includes collecting principal, interest and escrow account payments, if any, with respect to mortgage loans, as well as managing loss mitigation, which may include, among other things, collection activities, loan workouts, modifications, foreclosures and short sales. The Company may also engage in certain loan origination activities that include refinancing mortgage loans and arranging financings that facilitate sales of real estate owned properties.

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

   

2014

   

2013

   

2012

 

 

 

(in thousands)

 

Reimbursement of:

    

 

                

    

 

                

    

 

                

 

Common overhead incurred by the Company

 

$

10,850 

 

$

10,989 

 

$

4,183 

 

Expenses incurred on PMT's behalf

 

 

792 

 

 

4,638 

 

 

3,146 

 

 

 

$

11,642 

 

$

15,627 

 

$

7,329 

 

Payments and settlements during the year (1)

 

$

99,987 

 

$

121,230 

 

$

85,554 

 


The loan servicing agreements with the Investment Funds generally provide for fee revenue, which varies depending on the type and quality of the loans being serviced. The Company is also entitled to certain customary market-based fees and charges. This arrangement was modified, effective January 1, 2012, with respect to one of the Investment Funds. At that time, the Company settled its accrued servicing fee rebate and amended its loan servicing agreement with such fund to charge scheduled servicing fees in place of the previous “at cost” servicing arrangement.

(1)

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

 

F-22

F-24


 

Table of Contents

Amounts due from PMT are summarized below:

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

   

2014

   

2013

 

 

 

(in thousands)

 

Management fees

    

$

8,426 

    

$

8,924 

 

Allocated expenses

 

 

7,087 

 

 

2,009 

 

Unsettled excess servicing spread issuance

 

 

3,836 

 

 

 —

 

Servicing fees

 

 

3,385 

 

 

5,915 

 

Underwriting fees

 

 

1,137 

 

 

1,788 

 

 

 

$

23,871 

 

$

18,636 

 

The Company also holds an investment in PMT in the form of 75,000 common shares of beneficial interest as of December 31, 2014 and 2013. The common shares of beneficial interest had fair values of $1.6 million and $1.7 million as of December 31, 2014 and 2013, respectively.

Of the $123.3 million payable to PMT as of December 31, 2014, $116.7 million represents deposits made by PMT to fund servicing advances made by the Company, $6.2 million represents other expenses, including common overhead expenses, and $460,000 represents MSR recapture payable to PMT.

Of the $81.2 million payable to PMT as of December 31, 2013, $75.2 million represents deposits made by PMT to fund servicing advances made by the Company and $6.0 million represents other expenses, including common overhead expenses.

Investment Funds

Amounts due from the Investment Funds are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

December 31,

 

   

2014

 

2013

 

 

2016

    

2015

 

 

(in thousands)

 

 

(in thousands)

 

Carried Interest due from Investment Funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PNMAC Mortgage Opportunity Fund, LLC

 

$

40,771 

 

$

37,702 

 

 

$

42,427

 

$

41,893

 

PNMAC Mortgage Opportunity Fund Investors, LLC

 

 

26,527 

 

 

23,440 

 

 

 

28,479

 

 

28,033

 

 

$

67,298 

 

$

61,142 

 

 

$

70,906

 

$

69,926

 

Receivable from Investment Funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

Management fees

 

$

1,596 

 

$

2,031 

 

 

$

500

 

$

655

 

Loan servicing fees

 

 

476 

 

 

727 

 

Loan servicing rebate

 

 

189 

 

 

136 

 

Mortgage loan servicing fee rebate deposit

 

 

250

 

 

224

 

Expense reimbursements

 

 

30 

 

 

21 

 

 

 

238

 

 

45

 

Mortgage loan servicing fees

 

 

231

 

 

392

 

 

$

2,291 

 

$

2,915 

 

 

$

1,219

 

$

1,316

 

Payable to Investment Funds:

 

 

 

 

 

 

 

Deposits received to fund servicing advances

 

$

20,221

 

$

30,065

 

Other

 

 

172

 

 

364

 

 

$

20,393

 

$

30,429

 

Amounts due to the Investment Funds totaling $35.9 million and $36.9 million represent amounts advanced by the Investment Funds to fund servicing advances made by the Company as of December 31, 2014 and 2013, respectively.

 

Exchanged Private National Mortgage Acceptance Company, LLC Unitholders

 

As discussed in Note 1,3, Organization and Basis of Presentation,Significant Accounting Policies, the Company entered into a tax receivable agreement with PennyMac’s existing unitholders on the date of the IPOCompany’s initial public offering that will provide for the payment by the Company to PennyMac’s exchanged unitholders in an amount equal to 85% of the amount of the benefits, if any, that the Company is deemed to realize as a result of (i) increases in tax basis resulting from such unitholders’ exchanges and (ii) certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. Based on the PennyMac unitholder exchanges, the Company has recorded

F-23


TableFollowing is a summary of Contents

a  $75.0 million and $71.1 millionactivity in Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement as of December 31, 2014 and 2013, respectively, and it has not made any payments under such agreement.:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

 

2016

   

2015

   

2014

 

 

 

(in thousands)

 

Activity during the year:

 

 

 

 

 

 

 

 

 

 

Liability resulting from unit exchanges

 

$

2,190

 

$

2,728

 

$

5,346

 

Payments under tax receivable agreement

 

$

 -

 

$

(5,132)

 

$

 -

 

Revaluation of liability

 

$

(551)

 

$

1,695

 

$

(1,378)

 

Balance at end of year

 

$

75,954

 

$

74,315

 

 

 

 

Note 5—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 period.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 dilutive shares of common stock outstanding during the period, assuming all potentially dilutive shares of common stock were issued.year.

 

The Company applies the treasury stock method to determine the dilutive weighted average shares of common stock represented by the unvested stock-based compensation awards and the exchangeable PennyMac Class A units. The diluted earnings per share calculation assumes the exchange of these PennyMac Class A units for shares of common stock. Accordingly, earnings attributable to the Company’s common stockholders is also adjusted to include the earnings allocated to the PennyMac Class A units after taking into account the income taxes applicable to the earnings attributable to the shares of common stock assumed to be exchanged.

 

F-25


Table of Contents

The following table summarizes the basic and diluted earnings per share calculations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

Year ended December 31,

 

 

2016

    

2015

    

2014

 

   

2014

   

2013

 

 

(in thousands, except per share data)

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

Basic earnings per share of common stock:

    

 

 

    

 

 

 

 

 

 

    

 

 

    

 

 

 

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

    

$

36,842 

    

$

14,400 

 

 

$

66,079

    

$

47,228

    

$

36,842

 

Weighted average shares of common stock outstanding

 

 

21,250 

 

 

17,311 

 

 

 

22,161

 

21,755

 

21,250

 

Basic earnings per share of common stock

 

$

1.73 

 

$

0.83 

 

 

$

2.98

 

$

2.17

 

$

1.73

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

36,842 

 

$

14,400 

 

Effect of net income attributable to noncontrolling interest, net of income taxes

 

 

95,283 

 

 

47,838 

 

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

 

$

66,079

 

$

47,228

 

$

36,842

 

Effect of net income attributable to PennyMac Class A units exchangeable to common stock, net of income taxes

 

 

159,570

 

 

119,697

 

 

95,283

 

Diluted net income attributable to common stockholders

 

$

132,125 

 

$

62,238 

 

 

$

225,649

 

$

166,925

 

$

132,125

 

Weighted average shares of common stock outstanding

 

 

21,250 

 

 

17,311 

 

 

 

22,161

 

21,755

 

21,250

 

Dilutive shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PennyMac Class A units exchangeable to common stock

 

 

53,550 

 

 

57,206 

 

 

 

53,951

 

53,803

 

53,550

 

Non-vested PennyMac Class A units issuable under unit-based stock compensation plan and exchangeable to common stock

 

 

1,083 

 

 

1,347 

 

 

 

 —

 

427

 

1,083

 

Shares issuable under stock-based compensation plans

 

 

72 

 

 

28 

 

Common shares issuable under stock-based compensation plan

 

 

517

 

 

119

 

 

72

 

Diluted weighted average shares of common stock outstanding

 

 

75,955 

 

 

75,892 

 

 

 

76,629

 

 

76,104

 

 

75,955

 

Diluted earnings per share of common stock

 

$

1.73 

 

$

0.82 

 

 

$

2.94

 

$

2.17

 

$

1.73

 

 

The following table summarizes the anti-dilutive weighted-average number of outstanding stock options and performance-based restricted stock units (“RSUs”):

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

2016

   

2015

   

2014

 

(in thousands, except exercise price data)

 

 

 

 

 

 

 

 

 

 

Stock options (1)

 

 

1,829

 

 

1,748

 

 

976

Performance-based RSUs (2)

 

 

2,054

 

 

2,358

 

 

1,055

Total anti-dilutive stock-based compensation units

 

 

3,883

 

 

4,106

 

 

2,031

Weighted-average exercise price of anti-dilutive stock options (1)

 

$

15.81

 

$

18.17

 

$

18.23

(1)

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.

(2)

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.

 

Note 6—Loan Sales and Servicing Activities

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

 

F-24F-26


 

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

Year ended December 31,

 

 

2016

   

2015

   

2014

 

   

2014

   

2013

   

2012

 

 

(in thousands)

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Cash flows:

   

 

 

   

 

 

   

 

 

 

 

 

 

   

 

 

   

 

 

 

Sales proceeds

 

$

18,793,619 

 

$

17,006,460 

 

$

9,123,645 

 

 

$

49,633,909

 

$

36,679,638

 

$

18,793,619

 

Servicing fees received

 

$

113,364 

 

$

56,066 

 

$

11,197 

 

Servicing fees received (1)

 

$

261,163

 

$

140,767

 

$

113,364

 

Net servicing advances

 

$

16,796 

 

$

4,207 

 

$

7,818 

 

 

$

8,274

 

$

9,842

 

$

16,796

 

 

 

 

 

 

 

 

 

Year end information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance of loans outstanding at end of year

 

$

36,564,434 

 

$

23,640,261 

 

$

9,847,509 

 

Unpaid principal balance of mortgage loans outstanding at end of year

 

$

89,516,155

 

$

60,687,246

 

$

36,564,434

 

Delinquencies:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30-89 days

 

$

840,387 

 

$

410,927 

 

$

137,827 

 

 

$

2,545,970

 

$

1,561,483

 

$

852,826

 

90 days or more or in foreclosure or bankruptcy

 

$

255,835 

 

$

143,022 

 

$

54,795 

 

90 days or more:

 

 

 

 

 

 

 

 

Not in foreclosure

 

$

735,263

 

$

361,515

 

$

181,522

 

In foreclosure

 

$

137,856

 

$

106,264

 

$

20,180

 

Foreclosed

 

$

2,552

 

$

755

 

$

591

 

Bankruptcy

 

$

256,471

 

$

120,761

 

$

60,382

 


(1)

Net of guarantees paid to the Agencies

 

The Company’s mortgage servicing portfolio in UPB is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

December 31, 2014

 

 

 

 

Contract

 

Total

 

 

 

 

Contract

 

 

 

 

Servicing

 

 servicing and

 

mortgage

 

 

Servicing

 

 servicing and

 

Total

 

   

rights owned

   

subservicing

   

loans serviced

 

   

rights owned

   

subservicing

   

loans serviced

 

 

(in thousands)

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Investor:

 

 

 

 

 

 

 

 

 

 

 

                            

 

                            

 

                            

 

Non-affiliated entities

    

$

65,169,194 

    

$

 —

    

$

65,169,194 

 

    

$

131,252,002

    

$

 —

    

$

131,252,002

 

Affiliated entities

 

 

 —

 

 

39,709,945 

 

 

39,709,945 

 

 

 —

 

60,886,717

 

60,886,717

 

Mortgage loans held for sale

 

 

1,100,910 

 

 

 —

 

 

1,100,910 

 

 

 

2,101,283

 

 

 —

 

 

2,101,283

 

 

$

66,270,104 

 

$

39,709,945 

 

$

105,980,049 

 

 

$

133,353,285

 

$

60,886,717

 

$

194,240,002

 

Amount subserviced for the Company

 

$

 —

 

$

330,768 

 

$

330,768 

 

Commercial real estate loans subserviced for the Company

 

$

 —

 

$

22,338

 

$

22,338

 

Delinquent mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30 days

 

$

1,372,915 

 

$

302,091 

 

$

1,675,006 

 

 

$

3,240,640

 

$

407,177

 

$

3,647,817

 

60 days

 

 

434,428 

 

 

135,777 

 

 

570,205 

 

 

1,035,871

 

145,720

 

1,181,591

 

90 days or more

 

 

 

 

 

 

 

 

 

 

90 days or more:

 

 

 

 

 

 

 

Not in foreclosure

 

 

779,129 

 

 

1,057,973 

 

 

1,837,102 

 

 

2,203,895

 

566,496

 

2,770,391

 

In foreclosure

 

 

422,330 

 

 

1,544,762 

 

 

1,967,092 

 

 

937,204

 

685,001

 

1,622,205

 

Foreclosed

 

 

32,444 

 

 

533,067 

 

 

565,511 

 

 

 

28,943

 

 

448,017

 

 

476,960

 

 

$

3,041,246 

 

$

3,573,670 

 

$

6,614,916 

 

 

$

7,446,553

 

$

2,252,411

 

$

9,698,964

 

Bankruptcy

 

$

793,517

 

$

280,459

 

$

1,073,976

 

Custodial funds managed by the Company (1)

 

$

1,522,295 

 

$

388,498 

 

$

1,910,793 

 

 

$

3,097,365

 

$

736,398

 

$

3,833,763

 


(1)

Borrower and investor custodial cash accounts relate to mortgage loans serviced under the servicing agreements and are not recorded on the Company’s consolidated balance sheets. The Company earns interestplacement fees on certain of the custodial funds it manages on behalf of the mortgage loans’ investors, which is recorded as part of the interestInterest income in the Company’s consolidated statements of income.

F-25F-27


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

Contract

 

 

 

 

 

Servicing

 

servicing and

 

Total

 

 

   

rights owned

   

subservicing

   

loans serviced

 

 

 

(in thousands)

 

Investor:

    

 

 

    

 

 

    

 

 

 

Non-affiliated entities

 

$

44,969,026 

 

$

 —

 

$

44,969,026 

 

Affiliated entities

 

 

 —

 

 

31,632,718 

 

 

31,632,718 

 

Private investors

 

 

969,794 

 

 

89,361 

 

 

1,059,155 

 

Mortgage loans held for sale

 

 

506,540 

 

 

 —

 

 

506,540 

 

 

 

$

46,445,360 

 

$

31,722,079 

 

$

78,167,439 

 

Amount subserviced for the Company (1)

 

$

156,347 

 

$

582,610 

 

$

738,957 

 

Delinquent mortgage loans:

 

 

 

 

 

 

 

 

 

 

30 days

 

$

1,304,054 

 

$

263,518 

 

$

1,567,572 

 

60 days

 

 

346,912 

 

 

112,275 

 

 

459,187 

 

90 days or more

 

 

 

 

 

 

 

 

 

 

Not in foreclosure

 

 

605,555 

 

 

1,416,498 

 

 

2,022,053 

 

In foreclosure

 

 

168,776 

 

 

1,792,128 

 

 

1,960,904 

 

Foreclosed

 

 

25,272 

 

 

309,576 

 

 

334,848 

 

 

 

$

2,450,569 

 

$

3,893,995 

 

$

6,344,564 

 

Custodial funds managed by the Company (2)

 

$

568,161 

 

$

246,587 

 

$

814,748 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

Contract

 

Total

 

 

 

Servicing

 

servicing and

 

mortgage

 

 

   

rights owned

   

subservicing

   

loans serviced

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Investor:

    

 

                            

    

 

                            

    

 

                            

 

Non-affiliated entities

 

$

111,409,601

    

$

 —

 

$

111,409,601

 

Affiliated entities

 

 

 —

 

 

47,810,632

 

 

47,810,632

 

Mortgage loans held for sale

 

 

1,052,485

 

 

 —

 

 

1,052,485

 

 

 

$

112,462,086

 

$

47,810,632

 

$

160,272,718

 

Commercial real estate loans subserviced for the Company

 

$

 —

 

$

14,454

 

$

14,454

 

Delinquent mortgage loans:

 

 

 

 

 

 

 

 

 

 

30 days

 

$

2,666,435

 

$

349,859

 

$

3,016,294

 

60 days

 

 

834,617

 

 

136,924

 

 

971,541

 

90 days or more:

 

 

 

 

 

 

 

 

 

 

Not in foreclosure

 

 

1,270,236

 

 

788,410

 

 

2,058,646

 

In foreclosure

 

 

656,617

 

 

1,180,014

 

 

1,836,631

 

Foreclosed

 

 

23,372

 

 

542,031

 

 

565,403

 

 

 

$

5,451,277

 

$

2,997,238

 

$

8,448,515

 

Bankruptcy

 

$

457,192

 

$

342,132

 

$

799,324

 

Custodial funds managed by the Company (1)

 

$

2,242,146

 

$

502,751

 

$

2,744,897

 


(1)

Certain of the loans serviced by the Company are subserviced on the Company’s behalf by other mortgage loan servicers. Loans are subserviced for the Company on a transitional basis for loans where the Company has obtained the rights to service the loans but servicing of the loans has not yet transferred to the Company’s servicing system.

(2)

Borrower and investor custodial cash accounts relate to mortgage loans serviced under the servicing agreements and are not recorded on the Company’s consolidated balance sheets. The Company earns interestplacement fees on certain of the custodial funds it manages on behalf of the mortgage loans’ investors, which is recorded as part of the interestInterest income in the Company’s consolidated statements of income.

 

Following is a summary of the geographical distribution of mortgage loans included in the Company’s servicing portfolio for the top five and all other states as measured by UPB:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

December 31, 

State

   

2014

   

2013

 

 

2016

   

2015

 

(in thousands)

 

(in thousands)

 

 

 

 

 

 

California

    

$

33,751,630 

    

$

30,320,616 

 

 

$

42,303,952

    

$

39,007,363

Texas

 

 

6,954,778 

 

 

4,470,123 

 

 

 

16,037,426

 

12,191,722

Virginia

 

 

6,360,171 

 

 

3,769,683 

 

 

 

13,143,510

 

 

9,816,114

Florida

 

 

5,573,215 

 

 

3,416,274 

 

 

 

12,817,627

 

9,709,940

Washington

 

 

3,830,587 

 

 

2,760,900 

 

Maryland

 

 

8,564,923

 

 

6,151,945

All other states

 

 

49,509,668 

 

 

33,429,843 

 

 

 

101,372,564

 

 

83,395,634

 

$

105,980,049 

 

$

78,167,439 

 

 

$

194,240,002

 

$

160,272,718

 

 

 

 

 

 

 

 

Note 7—Netting of Financial Instruments

The Company uses derivative financial instruments to manage exposure to interest rate risk for the interest rate lock commitments (“IRLCs”)IRLCs it makes to purchase or originate mortgage loans at specified interest rates, its inventory of mortgage loans held for sale and MSRs. The Company has elected to present net derivative asset and liability positions,

F-26


Table of Contents

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.

 

F-28


Table of Contents

Following are summaries of derivative assets and related netting amounts.

 

Offsetting of Derivative Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

December 31, 2013

 

December 31, 2016

 

December 31, 2015

 

 

Gross

 

Gross amount

 

Net amount

 

Gross

 

Gross amount

 

Net amount

 

Gross

 

Gross amount

 

Net amount

 

Gross

 

Gross amount

 

Net amount

 

 

amount of

 

offset

 

of assets

 

amount of

 

offset

 

of assets

 

amount of

 

offset in the

 

of assets in the

 

amount of

 

offset in the

 

of assets in the

 

 

recognized

 

in the

 

in the

 

recognized

 

in the

 

in the

 

recognized

 

consolidated

 

consolidated

 

recognized

 

consolidated

 

consolidated

 

   

assets

   

balance sheet

   

balance sheet

   

assets

   

balance sheet

   

balance sheet

    

assets

    

balance sheet

    

balance sheet

    

assets

    

balance sheet

    

balance sheet

 

 

(in thousands)

 

(in thousands)

 

Derivatives subject to master netting arrangements:

 

 

                      

 

 

                      

 

 

                      

 

 

                      

 

 

                      

 

 

                      

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not subject to master netting arrangements - Interest rate lock commitments

 

$

65,848

 

$

 —

 

$

65,848

 

$

45,885

 

$

 —

 

$

45,885

 

Derivatives subject to a master netting arrangements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward purchase contracts

 

$

9,060 

 

$

 —

 

$

9,060 

 

$

416 

 

$

 —

 

$

416 

 

 

77,905

 

 

 —

 

 

77,905

 

 

4,181

 

 

 —

 

 

4,181

 

Forward sale contracts

 

 

320 

 

 

 —

 

 

320 

 

 

18,762 

 

 

 —

 

 

18,762 

 

 

28,324

 

 

 —

 

 

28,324

 

 

4,965

 

 

 —

 

 

4,965

 

MBS put options

 

 

476 

 

 

 —

 

 

476 

 

 

665 

 

 

 —

 

 

665 

 

 

3,934

 

 

 —

 

 

3,934

 

 

404

 

 

 —

 

 

404

 

MBS call options

 

 

 —

    

 

 —

    

 

 —

    

 

91 

    

 

 —

    

 

91 

 

 

217

 

 

 

 

 

217

 

 

 —

 

 

 —

 

 

 —

 

Put options on interest rate futures purchase contracts

 

 

862 

 

 

 —

 

 

862 

 

 

 —

 

 

 —

 

 

 —

 

 

3,109

 

 

 —

 

 

3,109

 

 

1,832

 

 

 —

 

 

1,832

 

Call options on interest rate futures purchase contracts

 

 

2,193 

 

 

 —

 

 

2,193 

 

 

 —

 

 

 —

 

 

 —

 

 

203

 

 

 —

 

 

203

 

 

1,555

 

 

 —

 

 

1,555

 

Netting

 

 

 —

 

 

(7,807)

 

 

(7,807)

 

 

 —

 

 

(7,358)

 

 

(7,358)

 

 

 —

 

 

(96,635)

 

 

(96,635)

 

 

 —

 

 

(8,542)

 

 

(8,542)

 

 

 

12,911 

 

 

(7,807)

 

 

5,104 

 

 

19,934 

 

 

(7,358)

 

 

12,576 

 

 

113,692

 

 

(96,635)

 

 

17,057

 

 

12,937

 

 

(8,542)

 

 

4,395

 

Derivatives not subject to master netting arrangements - IRLCs

 

 

33,353 

 

 

 —

 

 

33,353 

 

 

8,964 

 

 

 —

 

 

8,964 

 

$

46,264 

 

$

(7,807)

 

$

38,457 

 

$

28,898 

 

$

(7,358)

 

$

21,540 

 

$

179,540

 

$

(96,635)

 

$

82,905

 

$

58,822

 

$

(8,542)

 

$

50,280

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-27


Table of Contents

Derivative Assets, Financial Assets, and Collateral Held by Counterparty

 

The following table summarizes by significant counterparty the amount of derivative asset positions after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance qualifying for netting.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

December 31, 2013

 

 

 

 

 

 

Gross amount not 

 

 

 

 

 

 

 

Gross amount not

 

 

 

 

 

 

 

 

 

offset in the

 

 

 

 

 

 

 

offset in the

 

 

 

 

 

 

 

 

 

consolidated 

 

 

 

 

 

 

 

consolidated 

 

 

 

 

 

 

 

 

 

balance sheet

 

 

 

 

 

 

 

balance sheet

 

 

 

 

 

 

Net amount

 

 

 

 

 

 

 

 

 

 

Net amount

 

 

 

 

 

 

 

 

 

 

 

 

of assets

    

 

 

Cash

 

 

 

 

of assets

 

 

 

Cash

 

 

 

 

 

in the

 

Financial

 

collateral

 

Net

 

in the

 

Financial

 

collateral

 

Net

 

 

   

balance sheet

   

instruments

   

received

   

amount

   

balance sheet

   

instruments

   

received

   

amount

 

 

 

(in thousands)

 

Interest rate lock commitments

 

$

33,353 

 

$

 —

 

$

 —

 

$

33,353 

 

$

8,964 

 

$

 —

 

$

 —

 

$

8,964 

 

RJ O'Brien

 

 

2,005 

 

 

 —

 

 

 —

 

 

2,005 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Jefferies & Co.

 

 

764 

 

 

 —

 

 

 —

 

 

764 

 

 

627 

 

 

 —

 

 

 —

 

 

627 

 

Goldman Sachs

 

 

600 

 

 

 —

 

 

 —

 

 

600 

 

 

804 

 

 

 —

 

 

 —

 

 

804 

 

JP Morgan

 

 

526 

 

 

 —

 

 

 —

 

 

526 

 

 

788 

 

 

 —

 

 

 —

 

 

788 

 

Wells Fargo

 

 

379 

 

 

 —

 

 

 —

 

 

379 

 

 

451 

 

 

 —

 

 

 —

 

 

451 

 

Nomura

 

 

322 

 

 

 —

 

 

 —

 

 

322 

 

 

839 

 

 

 —

 

 

 —

 

 

839 

 

Credit Suisse First Boston Mortgage Capital, LLC

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,149 

 

 

 —

 

 

 —

 

 

2,149 

 

Morgan Stanley Bank, N.A.

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,704 

 

 

 —

 

 

 —

 

 

1,704 

 

Bank of America, N.A.

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,680 

 

 

 —

 

 

 —

 

 

1,680 

 

Daiwa Capital Markets

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,190 

 

 

 —

 

 

 —

 

 

1,190 

 

Others

 

 

508 

 

 

 —

 

 

 —

 

 

508 

 

 

2,344 

 

 

 —

 

 

 —

 

 

2,344 

 

 

 

$

38,457 

 

$

 —

 

$

 —

 

$

38,457 

 

$

21,540 

 

$

 —

 

$

 —

 

$

21,540 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

December 31, 2015

 

 

 

 

 

 

Gross amount not 

 

 

 

 

 

 

 

Gross amount not

 

 

 

 

 

 

 

 

 

offset in the

 

 

 

 

 

 

 

offset in the

 

 

 

 

 

 

 

 

 

consolidated 

 

 

 

 

 

 

 

consolidated 

 

 

 

 

 

 

 

 

 

balance sheet

 

 

 

 

 

 

 

balance sheet

 

 

 

 

 

 

Net amount

 

 

 

 

 

 

 

 

 

 

Net amount

 

 

 

 

 

 

 

 

 

 

 

 

of assets in the

    

 

 

Cash

 

 

 

 

of assets in the

 

 

 

Cash

 

 

 

 

 

consolidated

 

Financial

 

collateral

 

Net

 

consolidated

 

Financial

 

collateral

 

Net

 

 

    

balance sheet

    

instruments

    

received

    

amount

    

balance sheet

    

instruments

    

received

    

amount

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

$

65,848

 

$

 —

 

$

 —

 

$

65,848

 

$

45,885

 

$

 —

 

$

 —

 

$

45,885

 

Barclays Capital

 

 

12,002

 

 

 —

 

 

 —

 

 

12,002

 

 

72

 

 

 —

 

 

 —

 

 

72

 

RJ O'Brien

 

 

2,750

 

 

 —

 

 

 —

 

 

2,750

 

 

2,246

 

 

 —

 

 

 —

 

 

2,246

 

Jefferies & Co.

 

 

540

 

 

 —

 

 

 —

 

 

540

 

 

888

 

 

 —

 

 

 —

 

 

888

 

Goldman Sachs

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

471

 

 

 —

 

 

 —

 

 

471

 

Federal National Mortgage Association

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

453

 

 

 —

 

 

 —

 

 

453

 

Others

 

 

1,765

 

 

 —

 

 

 —

 

 

1,765

 

 

265

 

 

 —

 

 

 —

 

 

265

 

 

 

$

82,905

 

$

 —

 

$

 —

 

$

82,905

 

$

50,280

 

$

 —

 

$

 —

 

$

50,280

 

 

F-28F-29


 

Table of Contents

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. As discussed above, all derivatives with the exception of IRLCs are subject to master netting arrangements. The mortgage loansassets sold under agreements to repurchase do not qualify for netting.

 

 

 

 

 

��

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

December 31, 2013

 

 

December 31, 2016

 

December 31, 2015

 

 

 

 

 

 

Net

 

 

 

 

 

 

 

Net

 

 

 

 

 

 

Net

 

 

 

 

 

Net

 

 

 

 

 

 

amount

 

 

 

 

 

 

 

amount

 

 

 

 

 

 

amount

 

 

 

 

 

amount

 

 

Gross

 

Gross amount

 

of liabilities

 

Gross

 

Gross amount

 

of liabilities

 

 

Gross

 

Gross amount

 

of liabilities

 

Gross

 

Gross amount

 

of liabilities

 

 

amount of

 

offset in the

 

in the

 

amount of

 

offset in the

 

in the

 

 

amount of

 

offset in the

 

in the

 

amount of

 

offset in the

 

in the

 

 

recognized

 

consolidated

 

consolidated

 

recognized

 

consolidated

 

consolidated

 

 

recognized

 

consolidated

 

consolidated

 

recognized

 

consolidated

 

consolidated

 

   

liabilities

   

balance sheet

   

balance sheet

   

liabilities

   

balance sheet

   

balance sheet

 

   

liabilities

   

balance sheet

   

balance sheet

   

liabilities

   

balance sheet

   

balance sheet

 

 

(in thousands)

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not subject to master netting arrangements - IRLCs

 

$

6,457

 

$

 —

 

$

6,457

 

$

2,112

 

$

 —

 

$

2,112

 

Derivatives subject to a master netting arrangement:

 

 

                  

 

 

                  

 

 

                  

 

 

                  

 

 

                  

 

 

                  

 

 

                  

 

                  

 

                  

 

                  

 

                  

 

                  

 

Forward purchase contracts

    

$

141 

    

$

 —

    

$

141 

    

$

6,542 

    

$

 —

    

$

6,542 

 

    

 

16,914

    

 

 —

    

 

16,914

    

 

9,004

    

 

 —

    

 

9,004

 

Forward sale contracts

 

 

16,110 

 

 

 —

 

 

16,110 

 

 

504 

 

 

 —

 

 

504 

 

 

85,035

 

 —

 

85,035

 

7,497

 

 —

 

7,497

 

Put options on interest rate futures sale contracts

 

 

 

 

 —

 

 

 

 

 —

 

 

 —

 

 

 —

 

Put options on interest rate futures purchase contracts

 

 —

 

 —

 

 —

 

203

 

 —

 

203

 

Call options on interest rate futures purchase contracts

 

 —

 

 —

 

 —

 

47

 

 —

 

47

 

Netting

 

 

 —

 

 

(10,698)

 

 

(10,698)

 

 

 —

 

 

(6,787)

 

 

(6,787)

 

 

 

 —

 

 

(86,044)

 

 

(86,044)

 

 

 —

 

 

(9,780)

 

 

(9,780)

 

 

 

16,259 

 

 

(10,698)

 

 

5,561 

 

 

7,046 

 

 

(6,787)

 

 

259 

 

 

 

101,949

 

 

(86,044)

 

 

15,905

 

 

16,751

 

 

(9,780)

 

 

6,971

 

Derivatives not subject to a master netting arrangement - IRLCs

 

 

952 

 

 

 —

 

 

952 

 

 

2,203 

 

 

 —

 

 

2,203 

 

Total derivatives

 

 

17,211 

 

 

(10,698)

 

 

6,513 

 

 

9,249 

 

 

(6,787)

 

 

2,462 

 

 

 

108,406

 

 

(86,044)

 

 

22,362

 

 

18,863

 

 

(9,780)

 

 

9,083

 

Mortgage loans sold under agreements to repurchase

 

 

822,621 

 

 

 —

 

 

822,621 

 

 

471,592 

 

 

 —

 

 

471,592 

 

Mortgage loans sold under agreements to repurchase:

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount outstanding

 

1,736,922

 

 —

 

1,736,922

 

1,167,405

 

 —

 

1,167,405

 

Unamortized debt issuance costs

 

 

(1,808)

 

 

 —

 

 

(1,808)

 

 

(674)

 

 

 —

 

 

(674)

 

 

$

839,832 

 

$

(10,698)

 

$

829,134 

 

$

480,841 

 

$

(6,787)

 

$

474,054 

 

 

 

1,735,114

 

 

 —

 

 

1,735,114

 

 

1,166,731

 

 

 —

 

 

1,166,731

 

 

$

1,843,520

 

$

(86,044)

 

$

1,757,476

 

$

1,185,594

 

$

(9,780)

 

$

1,175,814

 

 

F-29F-30


 

Table of Contents

Derivative Liabilities, Financial Liabilities, and Collateral Held by Counterparty

 

The following table summarizes by significant counterparty the amount of derivative liabilities and mortgage loansassets sold under agreements to repurchase after considering master netting arrangements and financial instruments or cash pledged that does not qualify under the accounting guidance for netting. All assets sold under agreements to repurchase are secured by sufficient collateral or have fair value that exceeds the liability amount recorded on the consolidated balance sheets.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross amount

 

 

 

 

 

 

 

Gross amount

 

 

 

 

 

December 31, 2016

 

December 31, 2015

 

 

 

 

not offset in the

 

 

 

 

 

 

 

not offset in the

 

 

 

 

 

 

 

 

Gross amounts

 

 

 

 

 

 

 

Gross amounts

 

 

 

 

 

 

 

consolidated 

 

 

 

 

 

 

 

consolidated 

 

 

 

 

 

 

 

 

not offset in the

 

 

 

 

 

 

 

not offset in the

 

 

 

 

 

 

 

balance sheet

 

 

 

 

 

 

 

balance sheet

 

 

 

 

 

Net amount

 

consolidated 

 

 

 

Net amount

 

consolidated 

 

 

 

Net amount

 

 

 

 

 

 

 

 

 

 

Net amount

 

 

 

 

 

 

 

 

 

 

 

of liabilities

 

balance sheet

 

 

 

of liabilities

 

balance sheet

 

 

 

of liabilities

 

 

 

 

 

 

 

 

 

 

of liabilities

 

 

 

 

 

 

 

 

 

 

 

in the

 

 

 

 

Cash

 

 

 

in the

 

 

 

 

Cash

 

 

 

in the

 

 

 

 

Cash

 

 

 

 

in the

 

 

 

 

Cash

 

 

 

 

 

consolidated

 

Financial

 

 collateral 

 

Net

 

consolidated

 

Financial

 

collateral

 

Net

 

consolidated

 

Financial

 

collateral

 

Net

 

consolidated

 

Financial

 

collateral

 

Net

 

    

balance sheet

    

instruments

    

pledged

    

amount

    

balance sheet

    

instruments

    

pledged

    

amount

   

balance sheet

   

instruments

   

pledged

   

amount

   

balance sheet

   

instruments

   

pledged

   

amount

 

 

(in thousands)

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

    

$

952 

    

$

 —

    

$

 —

    

$

952 

    

$

2,203 

    

$

 —

    

$

 —

    

$

2,203 

 

 

$

6,457

 

$

 —

 

$

 —

 

$

6,457

 

$

2,112

 

$

 —

 

$

 —

 

$

2,112

Credit Suisse First Boston Mortgage Capital LLC

 

 

464,737 

 

 

(463,541)

 

 

 —

 

 

1,196 

 

 

198,888 

 

 

(198,888)

 

 

 —

 

 

 —

 

 

 

961,533

 

 

(960,988)

 

 

 —

 

 

545

 

 

795,179

 

 

(794,470)

 

 

 —

 

 

709

Bank of America, N.A.

 

 

236,909 

 

 

(236,771)

 

 

 —

 

 

138 

 

 

234,511 

 

 

(234,511)

 

 

 —

 

 

 —

 

 

 

349,638

 

 

(342,769)

 

 

 —

 

 

6,869

 

 

271,130

 

 

(269,510)

 

 

 —

 

 

1,620

Morgan Stanley Bank, N.A.

 

 

122,148 

 

 

(122,031)

 

 

 —

 

 

117 

 

 

38,193 

 

 

(38,193)

 

 

 —

 

 

 —

 

 

 

189,756

 

 

(188,851)

 

 

 —

 

 

905

 

 

49,763

 

 

(49,521)

 

 

 —

 

 

242

JP Morgan Chase Bank, N.A.

 

 

135,322

 

 

(135,322)

 

 

 —

 

 

 —

 

 

672

 

 

 —

 

 

 —

 

 

672

Citibank, N.A.

 

 

699 

 

 

(278)

 

 

 —

 

 

421 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

81,555

 

 

(80,525)

 

 

 —

 

 

1,030

 

 

55,948

 

 

(53,904)

 

 

 —

 

 

2,044

Bank of New York Mellon

 

 

1,552 

 

 

 —

 

 

 —

 

 

1,552 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Bank of Oklahoma

 

 

486 

 

 

 —

 

 

 —

 

 

486 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Barclays Capital

 

 

28,467

 

 

(28,467)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Royal Bank of Canada

 

 

2,937

 

 

 —

 

 

 —

 

 

2,937

 

 

 —

 

 

 —

 

 

 —

 

 

 —

BNP Paribas

 

 

1,151

 

 

 —

 

 

 —

 

 

1,151

 

 

738

 

 

 —

 

 

 —

 

 

738

Federal National Mortgage Association

 

 

1,033

 

 

 —

 

 

 —

 

 

1,033

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Goldman Sachs

 

 

823

 

 

 —

 

 

 —

 

 

823

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Others

 

 

1,651 

 

 

 —

 

 

 —

 

 

1,651 

 

 

259 

 

 

 —

 

 

 —

 

 

259 

 

 

 

612

 

 

 —

 

 

 —

 

 

612

 

 

946

 

 

 —

 

 

 —

 

 

946

 

$

829,134 

 

$

(822,621)

 

$

 —

 

$

6,513 

 

$

474,054 

 

$

(471,592)

 

$

 —

 

$

2,462 

 

 

$

1,759,284

 

$

(1,736,922)

 

$

 —

 

$

22,362

 

$

1,176,488

 

$

(1,167,405)

 

$

 —

 

$

9,083

 

 

Note 8—Fair Value

The Company’s consolidated financial statements include assets and liabilities that are measured 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 management has elected to carry the item at its fair value as discussed in the following paragraphs.

 

Fair Value Accounting Elections

 

Management identified all of its non-cash financial assets, and its originated MSRs relating to loans with initial interest rates of more than 4.5%, its purchased MSRs and MSRs purchased subject to ESS financingits MSLs to be accounted for at fair value so changes in fair value will be reflected in income as they occur and more timely reflect the results of the Company’s performance. Management has also identified its ESS financing to be accounted for at fair value as a means of hedging the related MSR’sMSRs’ fair value risk.

 

For originatedThe Company’s subsequent accounting for MSRs relating toand MSLs is based on the class of MSR or MSL. Originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5%, management has concluded that such assets present different risks to are accounted for using the Company than originatedamortization method. Originated MSRs relating to mortgagebacked by loans with initial interest rates of more than 4.5% and therefore require a different risk management approach. Management’s risk management efforts relating to these assetspurchased MSRs financed in part by ESS are aimedaccounted for at mainly moderating the effects of non-fair value with changes in fair value recorded in current period income. MSLs are carried at fair value with changes in fair value recorded in current period income.

F-30F-31


 

Table of Contents

interest rate risks on fair value, such as the effect of changes in home prices on the assets’ fair values. Management has identified these assets for accounting using the amortization method.

Management’s risk management efforts in connection with MSRs relating to mortgage loans with initial interest rates of more than 4.5% are aimed at mainly moderating the effects of changes in interest rates on the assets’ fair values. At times during the years ended December 31, 2014Assets and 2013, derivatives were used to hedge the fair value changes of the MSRs.

Financial Statement ItemsLiabilities Measured at Fair Value on a Recurring Basis

 

Following is a summary of financial statement itemsassets and liabilities that are measured at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

  

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

    

$

85,964

    

$

 —

    

$

 —

    

$

85,964

 

Mortgage loans held for sale at fair value

 

 

 —

 

 

2,125,544

 

 

47,271

 

 

2,172,815

 

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

 —

 

 

 —

 

 

65,848

 

 

65,848

 

Forward purchase contracts

 

 

 —

 

 

77,905

 

 

 —

 

 

77,905

 

Forward sales contracts

 

 

 —

 

 

28,324

 

 

 —

 

 

28,324

 

MBS put options

 

 

 —

 

 

3,934

 

 

 —

 

 

3,934

 

MBS call options

 

 

 —

 

 

217

 

 

 —

 

 

217

 

Put options on interest rate futures purchase contracts

 

 

3,109

 

 

 —

 

 

 —

 

 

3,109

 

Call options on interest rate futures purchase contracts

 

 

203

 

 

 —

 

 

 —

 

 

203

 

Total derivative assets before netting

 

 

3,312

 

 

110,380

 

 

65,848

 

 

179,540

 

Netting

 

 

 —

 

 

 —

 

 

 —

 

 

(96,635)

 

Total derivative assets

 

 

3,312

 

 

110,380

 

 

65,848

 

 

82,905

 

Investment in PennyMac Mortgage Investment Trust

 

 

1,228

 

 

 —

 

 

 —

 

 

1,228

 

Mortgage servicing rights at fair value

 

 

 —

 

 

 —

 

 

515,925

 

 

515,925

 

 

 

$

90,504

 

$

2,235,924

 

$

629,044

 

$

2,858,837

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

 —

 

$

 —

 

$

288,669

 

$

288,669

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

 —

 

 

 —

 

 

6,457

 

 

6,457

 

Forward purchase contracts

 

 

 —

 

 

16,914

 

 

 —

 

 

16,914

 

Forward sales contracts

 

 

 —

 

 

85,035

 

 

 —

 

 

85,035

 

Total derivative liabilities before netting

 

 

 —

 

 

101,949

 

 

6,457

 

 

108,406

 

Netting

 

 

 —

 

 

 —

 

 

 —

 

 

(86,044)

 

Total derivative liabilities

 

 

 —

 

 

101,949

 

 

6,457

 

 

22,362

 

Mortgage servicing liabilities at fair value

 

 

 —

 

 

 —

 

 

15,192

 

 

15,192

 

 

 

$

 —

 

$

101,949

 

$

310,318

 

$

326,223

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

    

$

21,687 

    

$

 —

    

$

 —

    

$

21,687 

 

Mortgage loans held for sale at fair value

 

 

 —

 

 

937,976 

 

 

209,908 

 

 

1,147,884 

 

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

 —

 

 

 —

 

 

33,353 

 

 

33,353 

 

Forward purchase contracts

 

 

 —

 

 

9,060 

 

 

 —

 

 

9,060 

 

Forward sales contracts

 

 

 —

 

 

320 

 

 

 —

 

 

320 

 

MBS put options

 

 

 —

 

 

476 

 

 

 —

 

 

476 

 

Put options on interest rate futures purchase contracts

 

 

862 

 

 

 —

 

 

 —

 

 

862 

 

Call options on interest rate futures purchase contracts

 

 

2,193 

 

 

 —

 

 

 —

 

 

2,193 

 

Total derivative assets before netting

 

 

3,055 

 

 

9,856 

 

 

33,353 

 

 

46,264 

 

Netting (1)

 

 

 —

 

 

 —

 

 

 —

 

 

(7,807)

 

Total derivative assets

 

 

3,055 

 

 

9,856 

 

 

33,353 

 

 

38,457 

 

Investment in PennyMac Mortgage Investment Trust

 

 

1,582 

 

 

 —

 

 

 —

 

 

1,582 

 

Mortgage servicing rights at fair value

 

 

 —

 

 

 —

 

 

325,383 

 

 

325,383 

 

 

 

 

26,324 

 

 

947,832 

 

 

568,644 

 

 

1,534,993 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

 —

 

$

 —

 

$

191,166 

 

$

191,166 

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

 —

 

 

 —

 

 

952 

 

 

952 

 

Forward purchase contracts

 

 

 —

 

 

141 

 

 

 —

 

 

141 

 

Forward sales contracts

 

 

 —

 

 

16,110 

 

 

 —

 

 

16,110 

 

Put options on interest rate futures sale contracts

 

 

 

 

 —

 

 

 —

 

 

 

Total derivative liabilities before netting

 

 

 

 

16,251 

 

 

952 

 

 

17,211 

 

Netting (1)

 

 

 —

 

 

 —

 

 

 —

 

 

(10,698)

 

Total derivative liabilities

 

 

 

 

16,251 

 

 

952 

 

 

6,513 

 

Mortgage servicing liabilities

 

 

 —

 

 

 —

 

 

6,306 

 

 

6,306 

 

 

 

$

 

$

16,251 

 

$

198,424 

 

$

203,985 

 


(1)

Derivatives are reported net of cash collateral received and paid and, to the extent that the criteria of the accounting guidance covering the offsetting of amounts related to certain contracts are met, positions with the same counterparty are netted as part of a legally enforceable master netting agreement.

F-31F-32


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

Assets:

    

 

 

    

 

 

    

 

 

    

 

 

 

Short-term investments

 

$

142,582 

 

$

 —

 

$

 —

 

$

142,582 

 

Mortgage loans held for sale at fair value

 

 

 —

 

 

527,071 

 

 

3,933 

 

 

531,004 

 

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

 —

 

 

 —

 

 

8,964 

 

 

8,964 

 

Forward purchase contracts

 

 

 —

 

 

416 

 

 

 —

 

 

416 

 

Forward sales contracts

 

 

 —

 

 

18,762 

 

 

 —

 

 

18,762 

 

MBS put options

 

 

 —

 

 

665 

 

 

 —

 

 

665 

 

MBS call options

 

 

 —

 

 

91 

 

 

 —

 

 

91 

 

Total derivative assets before netting

 

 

 —

 

 

19,934 

 

 

8,964 

 

 

28,898 

 

Netting (1)

 

 

 —

 

 

 —

 

 

 —

 

 

(7,358)

 

Total derivative assets

 

 

 —

 

 

19,934 

 

 

8,964 

 

 

21,540 

 

Investment in PennyMac Mortgage Investment Trust

 

 

1,722 

 

 

 —

 

 

 —

 

 

1,722 

 

Mortgage servicing rights at fair value

 

 

 —

 

 

 —

 

 

224,913 

 

 

224,913 

 

 

 

$

144,304 

 

$

547,005 

 

$

237,810 

 

$

921,761 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

 —

 

$

 —

 

$

138,723 

 

$

138,723 

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

 —

 

 

 —

 

 

2,203 

 

 

2,203 

 

Forward purchase contracts

 

 

 —

 

 

6,542 

 

 

 —

 

 

6,542 

 

Forward sales contracts

 

 

 —

 

 

504 

 

 

 —

 

 

504 

 

Total derivative liabilities before netting

 

 

 —

 

 

7,046 

 

 

2,203 

 

 

9,249 

 

Netting (1)

 

 

 —

 

 

(6,787)

 

 

 —

 

 

(6,787)

 

Total derivative liabilities

 

 

 —

 

 

259 

 

 

2,203 

 

 

2,462 

 

 

 

$

 —

 

$

259 

 

$

140,926 

 

$

141,185 

 


(1)

Derivatives are reported net of cash collateral received and paid and, to the extent that the criteria of the accounting guidance covering the offsetting of amounts related to certain contracts are met, positions with the same counterparty are netted as part of a legally enforceable master netting agreement.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

    

 

 

    

 

 

    

 

 

    

 

 

 

Short-term investments

    

$

46,319

    

$

 —

    

$

 —

    

$

46,319

 

Mortgage loans held for sale at fair value

 

 

 —

 

 

1,052,673

 

 

48,531

 

 

1,101,204

 

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

 —

 

 

 —

 

 

45,885

 

 

45,885

 

Forward purchase contracts

 

 

 —

 

 

4,181

 

 

 —

 

 

4,181

 

Forward sales contracts

 

 

 —

 

 

4,965

 

 

 —

 

 

4,965

 

MBS put options

 

 

 —

 

 

404

 

 

 —

 

 

404

 

Put options on interest rate futures purchase contracts

 

 

1,832

 

 

 —

 

 

 —

 

 

1,832

 

Call options on interest rate futures purchase contracts

 

 

1,555

 

 

 —

 

 

 —

 

 

1,555

 

Total derivative assets before netting

 

 

3,387

 

 

9,550

 

 

45,885

 

 

58,822

 

Netting

 

 

 —

 

 

 —

 

 

 —

 

 

(8,542)

 

Total derivative assets

 

 

3,387

 

 

9,550

 

 

45,885

 

 

50,280

 

Investment in PennyMac Mortgage Investment Trust

 

 

1,145

 

 

 —

 

 

 —

 

 

1,145

 

Mortgage servicing rights at fair value

 

 

 —

 

 

 —

 

 

660,247

 

 

660,247

 

 

 

$

50,851

 

$

1,062,223

 

$

754,663

 

$

1,859,195

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

 —

 

$

 —

 

$

412,425

 

$

412,425

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

 —

 

 

 —

 

 

2,112

 

 

2,112

 

Forward purchase contracts

 

 

 —

 

 

9,004

 

 

 —

 

 

9,004

 

Forward sales contracts

 

 

 —

 

 

7,497

 

 

 —

 

 

7,497

 

Put options on interest rate futures purchase contracts

 

 

203

 

 

 —

 

 

 —

 

 

203

 

Call options on interest rate futures purchase contracts

 

 

47

 

 

 —

 

 

 —

 

 

47

 

Total derivative liabilities before netting

 

 

250

 

 

16,501

 

 

2,112

 

 

18,863

 

Netting

 

 

 —

 

 

 —

 

 

 —

 

 

(9,780)

 

Total derivative liabilities

 

 

250

 

 

16,501

 

 

2,112

 

 

9,083

 

Mortgage servicing liabilities at fair value

 

 

 —

 

 

 —

 

 

1,399

 

 

1,399

 

 

 

$

250

 

$

16,501

 

$

415,936

 

$

422,907

 

 

F-32F-33


 

Table of Contents

As shown above, certain of the Company’s mortgage loans held for sale, IRLCs, MSRs at fair value, and ESS financing at fair value 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, 20142016 where Level 3 significantfair value inputs were used:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2014

 

 

 

Mortgage

 

Net interest 

 

Mortgage 

 

 

 

 

 

 

loans held

 

rate lock

 

servicing 

 

 

 

 

 

 

for sale

 

commitments (1)

 

rights

 

 

Total

 

 

    

(in thousands)

 

Assets:

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance, December 31, 2013

 

$

3,933 

 

$

6,761 

 

$

224,913 

 

$

235,607 

 

Purchases

 

 

1,049,838 

 

 

 —

 

 

135,480 

 

 

1,185,318 

 

Sales

 

 

(577,968)

 

 

 —

 

 

(10,881)

 

 

(588,849)

 

Repayments

 

 

(22,016)

 

 

 —

 

 

 —

 

 

(22,016)

 

Interest rate lock commitments issued, net

 

 

 —

 

 

181,159 

 

 

 —

 

 

181,159 

 

Mortgage servicing rights resulting from mortgage loan sales

 

 

 —

 

 

 —

 

 

22,733 

 

 

22,733 

 

Changes in fair value included in income arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument-specific credit risk

 

 

 —

 

 

 

 

 

 

 

 

 —

 

Other factors

 

 

(3,534)

 

 

22,741 

 

 

(46,862)

 

 

(27,655)

 

 

 

 

(3,534)

 

 

22,741 

 

 

(46,862)

 

 

(27,655)

 

Transfers to Level 2 mortgage loans held for sale (2)

 

 

(240,345)

 

 

 —

 

 

 —

 

 

(240,345)

 

Transfers of interest rate lock commitments to mortgage loans held for sale

 

 

 —

 

 

(178,260)

 

 

 —

 

 

(178,260)

 

Balance, December 31, 2014

 

$

209,908 

 

$

32,401 

 

$

325,383 

 

$

567,692 

 

Changes in fair value recognized during the year relating to assets still held at December 31, 2014

 

$

(3,377)

 

$

32,401 

 

$

(47,618)

 

$

(18,594)

 


(1)

For the purpose of this table, the interest rate lock asset and liability positions are shown net.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2016

 

 

 

Mortgage

 

Net interest 

 

Mortgage 

 

 

 

 

 

 

loans held

 

rate lock

 

servicing 

 

 

 

 

 

 

for sale

 

commitments (1)

 

rights

 

 

Total

 

 

    

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance, December 31, 2015

 

$

48,531

 

$

43,773

 

$

660,247

 

$

752,551

 

Purchases

 

 

1,608,627

 

 

 —

 

 

146

 

 

1,608,773

 

Sales

 

 

(1,164,201)

 

 

 —

 

 

 —

 

 

(1,164,201)

 

Repayments

 

 

(38,420)

 

 

 —

 

 

 —

 

 

(38,420)

 

Interest rate lock commitments issued, net

 

 

 —

 

 

429,598

 

 

 —

 

 

429,598

 

Mortgage servicing rights resulting from mortgage loan sales

 

 

 —

 

 

 —

 

 

17,319

 

 

17,319

 

Changes in fair value included in income arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument-specific credit risk

 

 

3,469

 

 

 —

 

 

 —

 

 

3,469

 

Other factors

 

 

 —

 

 

143,867

 

 

(161,787)

 

 

(17,920)

 

 

 

 

3,469

 

 

143,867

 

 

(161,787)

 

 

(14,451)

 

Transfers of mortgage loans held for sale from Level 3 to Level 2 (2)

 

 

(410,735)

 

 

 —

 

 

 —

 

 

(410,735)

 

Transfers of interest rate lock commitments to mortgage loans held for sale

 

 

 —

 

 

(557,847)

 

 

 —

 

 

(557,847)

 

Balance, December 31, 2016

 

$

47,271

 

$

59,391

 

$

515,925

 

$

622,587

 

Changes in fair value recognized during the year relating to assets still held at December 31, 2016

 

$

936

 

$

59,391

 

$

(161,787)

 

$

(101,460)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)

Mortgage loans held for sale transferred from Level 3 to Level 2 as a result of the mortgage loan becoming saleable into active mortgage markets pursuant to a loan modification or borrower reperformance.


 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2014

 

 

 

Excess

 

 

 

 

 

 

 

 

servicing

 

Mortgage

 

 

 

 

 

 

spread

 

servicing

 

 

 

 

 

 

financing

 

liabilities

 

Total

 

 

 

(in thousands)

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2013

    

$

138,723 

    

$

 —

    

$

138,723 

 

Proceeds received from issuance of excess servicing spread

 

 

99,728 

 

 

 —

 

 

99,728 

 

Mortgage servicing liabilities resulting from mortgage loan sales

 

 

 —

 

 

1,965 

 

 

1,965 

 

Excess servicing spread issued pursuant to a recapture agreement with PennyMac Mortgage Investment Trust

 

 

7,342 

 

 

 —

 

 

7,342 

 

Accrual of interest on excess servicing spread

 

 

13,292 

 

 

 —

 

 

13,292 

 

Repayments

 

 

(39,256)

 

 

 —

 

 

(39,256)

 

Changes in fair value included in income

 

 

(28,663)

 

 

4,341 

 

 

(24,322)

 

Balance, December 31, 2014

 

$

191,166 

 

$

6,306 

 

$

197,472 

 

Changes in fair value recognized during the year relating to liabilities still held at December 31, 2014

    

$

(28,663)

    

$

4,341 

    

$

(24,322)

 

F-33


Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2013

 

 

 

Mortgage

 

Net interest 

 

Mortgage

 

 

 

 

 

 

loans held

 

rate lock

 

servicing

 

 

 

 

 

 

for sale

 

commitments (1)

 

rights

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

        

$

 —

        

$

23,940 

        

$

19,798 

        

$

43,738 

 

Purchases

 

 

 —

 

 

 —

 

 

195,871 

 

 

195,871 

 

Repurchases of mortgage loans subject to representations and warranties

 

 

5,529 

 

 

 —

 

 

 —

 

 

5,529 

 

Repayments

 

 

(1,364)

 

 

 —

 

 

 —

 

 

(1,364)

 

Sales

 

 

 —

 

 

 —

 

 

(550)

 

 

(550)

 

Interest rate lock commitments issued, net

 

 

 —

 

 

101,179 

 

 

 —

 

 

101,179 

 

Mortgage servicing rights resulting from mortgage loan sales

 

 

 —

 

 

 —

 

 

14,636 

 

 

14,636 

 

Changes in fair value included in income arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument-specific credit risk

 

 

 —

 

 

 

 

 

 

 

 

 —

 

Other factors

 

 

(232)

 

 

(15,682)

 

 

(4,842)

 

 

(20,756)

 

 

 

 

(232)

 

 

(15,682)

 

 

(4,842)

 

 

(20,756)

 

Transfers of interest rate lock commitments to mortgage loans held for sale

 

 

 —

 

 

(102,676)

 

 

 —

 

 

(102,676)

 

Balance, December 31, 2013

    

$

3,933 

 

$

6,761 

 

$

224,913 

 

$

235,607 

 

Changes in fair value recognized during the year relating to assets still held at December 31, 2013

    

$

(390)

 

$

6,761 

 

$

(4,842)

 

$

1,529 

 


(1)

For the purpose of this table, the interest rate lock asset and liability positions are shown net.

 

(2)

Mortgage loans held for sale are transferred from “Level 3” to “Level 2” as a result of the mortgage loan becoming saleable into active mortgage markets pursuant to a loan modification, borrower reperformance or resolution of deficiencies found in the borrowers’ credit files.

F-34


Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2016

 

 

 

Excess

 

 

 

 

 

 

 

 

servicing

 

Mortgage

 

 

 

 

 

 

spread

 

servicing

 

 

 

 

 

 

financing

 

liabilities

 

Total

  

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2015

    

$

412,425

    

$

1,399

    

$

413,824

 

Issuance of excess servicing spread financing:

 

 

 

 

 

 

 

 

 

 

For cash

 

 

 —

 

 

 —

 

 

 —

 

Pursuant to a recapture agreement with PennyMac Mortgage Investment Trust

 

 

6,603

 

 

 —

 

 

6,603

 

Accrual of interest

 

 

22,601

 

 

 —

 

 

22,601

 

Repayments

 

 

(69,992)

 

 

 —

 

 

(69,992)

 

Settlement

 

 

(59,045)

 

 

 —

 

 

(59,045)

 

Mortgage servicing liabilities accepted for cash

 

 

 —

 

 

10,139

 

 

10,139

 

Mortgage servicing liabilities resulting from mortgage loan sales

 

 

 —

 

 

14,991

 

 

14,991

 

Changes in fair value included in income

 

 

(23,923)

 

 

(11,337)

 

 

(35,260)

 

Balance, December 31, 2016

 

$

288,669

 

$

15,192

 

$

303,861

 

Changes in fair value recognized during the year relating to liabilities still outstanding at December 31, 2016

 

$

(16,713)

 

$

(11,337)

 

$

(28,050)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2015

 

 

 

Mortgage

 

Net interest 

 

Mortgage

 

 

 

 

 

 

loans held

 

rate lock

 

servicing

 

 

 

 

 

 

for sale

 

commitments (1)

 

rights

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014

    

$

209,908

    

$

32,401

    

$

325,383

    

$

567,692

 

Purchases

 

 

911,124

 

 

 —

 

 

382,824

 

 

1,293,948

 

Sales

 

 

(803,424)

 

 

 —

 

 

 —

 

 

(803,424)

 

Repayments

 

 

(40,995)

 

 

 —

 

 

 —

 

 

(40,995)

 

Interest rate lock commitments issued, net

 

 

 —

 

 

271,692

 

 

 —

 

 

271,692

 

Mortgage servicing rights resulting from mortgage loan sales

 

 

 —

 

 

 —

 

 

18,013

 

 

18,013

 

Changes in fair value included in income arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument-specific credit risk

 

 

4,233

 

 

 —

 

 

 —

 

 

4,233

 

Other factors

 

 

 —

 

 

73,068

 

 

(65,973)

 

 

7,095

 

 

 

 

4,233

 

 

73,068

 

 

(65,973)

 

 

11,328

 

Transfers of mortgage loans held for sale from Level 3 to Level 2  (2)

 

 

(232,315)

 

 

 —

 

 

 —

 

 

(232,315)

 

Transfers of interest rate lock commitments to mortgage loans held for sale

 

 

 —

 

 

(333,388)

 

 

 —

 

 

(333,388)

 

Balance, December 31, 2015

    

$

48,531

 

$

43,773

 

$

660,247

 

$

752,551

 

Changes in fair value recognized during the year relating to assets still held at December 31, 2015

    

$

4,305

 

$

43,773

 

$

(65,973)

 

$

(17,895)

 


(1)

For the purpose of this table, the interest rate lock asset and liability positions are shown net.

 

(2)

Mortgage loans held for sale are transferred from “Level 3” to “Level 2” as a result of the mortgage loan becoming saleable into active mortgage markets pursuant to a loan modification, borrower reperformance or resolution of deficiencies found in the borrowers’ credit files.

F-35


Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2015

 

 

 

Excess

 

 

 

 

 

 

 

servicing

 

Mortgage 

 

 

 

 

 

spread

 

servicing

 

 

 

 

 

financing

 

liabilities

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014

    

$

191,166

    

$

6,306

    

$

197,472

 

Issuance of excess servicing spread financing:

 

 

 

 

 

 

 

 

 

 

For cash

 

 

271,554

 

 

 —

 

 

271,554

 

Pursuant to a recapture agreement with PennyMac Mortgage Investment Trust

 

 

6,728

 

 

 —

 

 

6,728

 

Mortgage servicing liabilities resulting from mortgage loan sales

 

 

 —

 

 

20,442

 

 

20,442

 

Accrual of interest

 

 

25,365

 

 

 —

 

 

25,365

 

Repayments

 

 

(78,578)

 

 

 —

 

 

(78,578)

 

Changes in fair value included in income

 

 

(3,810)

 

 

(25,349)

 

 

(29,159)

 

Balance, December 31, 2015

 

$

412,425

 

$

1,399

 

$

413,824

 

Changes in fair value recognized during the year relating to liabilities still outstanding at December 31, 2015

 

$

(3,810)

 

$

(25,349)

 

$

(29,159)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2014

 

 

 

Mortgage

 

Net interest 

 

Mortgage

 

 

 

 

 

 

loans held

 

rate lock

 

servicing

 

 

 

 

 

    

for sale

 

commitments (1)

 

rights

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2013

    

$

3,933

    

$

6,761

    

$

224,913

    

$

235,607

 

Purchases

 

 

1,049,838

 

 

 —

 

 

135,480

 

 

1,185,318

 

Sales

 

 

(577,968)

 

 

 —

 

 

(10,881)

 

 

(588,849)

 

Repayments

 

 

(22,016)

 

 

 —

 

 

 —

 

 

(22,016)

 

Interest rate lock commitments issued, net

 

 

 —

 

 

181,159

 

 

 —

 

 

181,159

 

Mortgage servicing rights resulting from mortgage loan sales

 

 

 —

 

 

 —

 

 

22,733

 

 

22,733

 

Changes in fair value included in income arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument-specific credit risk

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Other factors

 

 

(3,534)

 

 

22,741

 

 

(46,862)

 

 

(27,655)

 

 

 

 

(3,534)

 

 

22,741

 

 

(46,862)

 

 

(27,655)

 

Transfers of mortgage loans held for sale from Level 3 to Level 2 (2)

 

 

(240,345)

 

 

 —

 

 

 —

 

 

(240,345)

 

Transfers of interest rate lock commitments to mortgage loans held for sale

 

 

 —

 

 

(178,260)

 

 

 —

 

 

(178,260)

 

Balance, December 31, 2014

 

$

209,908

 

$

32,401

 

$

325,383

 

$

567,692

 

Changes in fair value recognized during the year relating to assets still held at December 31, 2014

 

$

(3,377)

 

$

32,401

 

$

(47,618)

 

$

(18,594)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)

ExcessFor the purpose of this table, the interest rate lock asset and liability positions are shown net.

(2)

servicing

spread

financing

(Mortgage loans held for sale are transferred from “Level 3” to “Level 2” as a result of the mortgage loan becoming saleable into active mortgage markets pursuant to a loan modification, borrower reperformance or resolution of deficiencies found in thousands)

Liability:

Balance, December 31, 2012

$

 —

Proceeds received from issuance of excess servicing spread

139,028 

Accrual of interest on excess servicing spread

1,348 

Repayments

(4,076)

Changes in fair value included in income

2,423 

Balance, December 31, 2013

$

138,723 

Changes in fair value recognized during the year relating to liability still held at December 31, 2013

$

2,423 

borrowers’ credit files.

 

 

F-34F-36


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2012

 

 

 

Net interest

 

Mortgage

 

 

 

 

 

 

rate lock

 

servicing

 

 

 

 

 

 

commitments (1)

 

rights

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2011

 

$

7,905 

 

$

25,698 

 

$

33,603 

 

Interest rate lock commitments issued, net

 

 

167,066 

 

 

 —

 

 

167,066 

 

Mortgage servicing rights resulting from mortgage loan sales

 

 

 —

 

 

774 

 

 

774 

 

Changes in fair value included in income arising from:

 

 

 

 

 

 

 

 

 

 

Changes in instrument-specific credit risk

 

 

 

 

 

 

 

 

 

 

Other factors

 

 

 —

 

 

(6,674)

 

 

(6,674)

 

 

 

 

 —

 

 

(6,674)

 

 

(6,674)

 

Transfers of interest rate lock commitments to mortgage loans held for sale

 

 

(151,031)

 

 

 —

 

 

(151,031)

 

Balance, December 31, 2012

 

$

23,940 

 

$

19,798 

 

$

43,738 

 

Changes in fair value recognized during the year relating to assets still held at December 31, 2012

 

$

23,940 

 

$

(6,674)

 

$

17,266 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2014

 

 

 

Excess

 

 

 

 

 

 

 

 

 

servicing

 

Mortgage 

 

 

 

 

 

 

spread

 

servicing

 

 

 

 

 

    

financing

    

liabilities

    

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2013

 

$

138,723

    

$

 —

    

$

138,723

 

Issuance of excess servicing spread financing:

 

 

 

 

 

 

 

 

 

 

For cash

 

 

99,728

 

 

 —

 

 

99,728

 

Pursuant to a recapture agreement with PennyMac Mortgage Investment Trust

 

 

7,342

 

 

 —

 

 

7,342

 

Mortgage servicing liabilities resulting from mortgage loan sales

 

 

 —

 

 

1,965

 

 

1,965

 

Accrual of interest

 

 

13,292

 

 

 —

 

 

13,292

 

Repayments

 

 

(39,256)

 

 

 —

 

 

(39,256)

 

Changes in fair value included in income

 

 

(28,663)

 

 

4,341

 

 

(24,322)

 

Balance, December 31, 2014

 

$

191,166

 

$

6,306

 

$

197,472

 

Changes in fair value recognized during the year relating to liabilities still outstanding at December 31, 2014

 

$

(28,663)

 

$

4,341

 

$

(24,322)

 

 

The information used in the preceding roll forwards represents activity for any financial statement itemsassets and liabilities measured at fair value on a recurring basis and identified as using Level 3“Level 3” significant fair value inputs at either the beginning or the end of the periods presented. The Company had transfers in or out among the fair value levels arising from transfers of IRLCs to mortgage loans held for sale at fair value upon purchase or funding of the respective mortgage loans and from the return to salability in the active secondary market of certain mortgage loans held for sale. Such loans became saleable into

Assets and Liabilities Measured at Fair Value under the active secondary market due to curing of the loans’ defects through borrower reperformance, modification of the loan or resolution of deficiencies contained in the borrowers’ credit file.Fair Value Option

 

Net changes in fair values included in income for financial statement itemsassets and liabilities carried at fair value as a result of management’s election of the fair value option by income statement line item are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

Year ended December 31,

 

 

2016

 

2015

 

2014

 

2014

 

2013

 

2012

 

    

Net gains on 

   

Net

   

 

 

   

Net gains on 

   

Net

 

 

   

Net gains on 

   

Net

 

   

 

 

Net gains on 

 

 

 

 

 

 

 

Net gains on 

 

 

 

 

 

 

 

Net gains on 

 

 

 

 

 

 

 

 

mortgage

 

mortgage

 

 

 

mortgage

 

mortgage

 

 

 

mortgage

 

mortgage

 

 

 

mortgage

 

 

 

 

 

 

 

mortgage

 

 

 

 

 

 

 

mortgage

 

 

 

 

 

 

 

 

loans held

 

loan

 

 

 

loans held

 

loan

 

 

 

loans held

 

loan

 

 

 

loans held

 

Net

 

 

 

 

loans held

 

Net

 

 

 

 

loans held

 

Net

 

 

 

 

 

for sale at 

 

servicing

 

 

 

for sale at 

 

servicing

 

 

 

for sale at 

 

servicing

 

 

 

for sale at 

 

servicing

 

 

 

 

for sale at 

 

servicing

 

 

 

 

for sale at 

 

servicing

 

 

 

 

    

fair value

    

fees

    

Total

    

fair value

    

fees

    

Total

    

fair value

    

fees

    

Total

 

fair value

 

fees

 

Total

 

fair value

 

fees

 

Total

 

fair value

 

fees

 

Total

 

 

(in thousands)

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans held for sale at fair value

 

$

264,312 

 

$

 —

 

$

264,312 

 

$

49,559 

 

$

 —

 

$

49,559 

 

$

171,236 

 

$

 —

 

$

171,236 

 

 

$

513,331

 

$

 —

 

$

513,331

 

$

372,139

 

$

 —

 

$

372,139

 

$

264,312

 

$

 —

 

$

264,312

Mortgage servicing rights at fair value

 

 

 —

 

 

(54,205)

 

 

(54,205)

 

 

 —

 

 

(4,842)

 

 

(4,842)

 

 

 —

 

 

(6,674)

 

 

(6,674)

 

 

 

 —

 

 

(161,787)

 

 

(161,787)

 

 

 —

 

 

(65,973)

 

 

(65,973)

 

 

 —

 

 

(54,205)

 

 

(54,205)

 

$

264,312 

 

$

(54,205)

 

$

210,107 

 

$

49,559 

 

$

(4,842)

 

$

44,717 

 

$

171,236 

 

$

(6,674)

 

$

164,562 

 

 

$

513,331

 

$

(161,787)

 

$

351,544

 

$

372,139

 

$

(65,973)

 

$

306,166

 

$

264,312

 

$

(54,205)

 

$

210,107

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

 —

 

$

28,663 

 

$

28,663 

 

$

 —

 

$

(2,423)

 

$

(2,423)

 

$

 —

 

$

 —

 

$

 —

 

 

$

 —

 

$

23,923

 

$

23,923

 

$

 —

 

$

3,810

 

$

3,810

 

$

 —

 

$

28,663

 

$

28,663

Mortgage servicing liabilities

 

 

 —

 

 

(4,341)

 

 

(4,341)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Mortgage servicing liabilities at fair value

 

 

 —

 

 

11,337

 

 

11,337

 

 

 —

 

 

25,349

 

 

25,349

 

 

 —

 

 

(4,341)

 

 

(4,341)

 

$

 —

 

$

24,322 

 

$

24,322 

 

$

 —

 

$

(2,423)

 

$

(2,423)

 

$

 —

 

$

 —

 

$

 —

 

 

$

 —

 

$

35,260

 

$

35,260

 

$

 —

 

$

29,159

 

$

29,159

 

$

 —

 

$

24,322

 

$

24,322

 

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Table of Contents

Following are the fair value and related principal amounts due upon maturity of assets and liabilities accounted for under the fair value option:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

Principal

 

 

 

 

 

 

 

 

 

amount

 

 

 

 

 

 

Fair

 

 due upon 

 

 

 

 

 

    

value

    

maturity

    

Difference

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans held for sale:

 

 

 

 

 

 

 

 

 

 

Current through 89 days delinquent

 

$

2,148,947

 

$

2,077,034

 

$

71,913

 

90 days or more delinquent:

 

 

 

 

 

 

 

 

 

 

Not in foreclosure

 

 

19,227

 

 

19,399

 

 

(172)

 

In foreclosure

 

 

4,641

 

 

4,850

 

 

(209)

 

 

 

$

2,172,815

 

$

2,101,283

 

$

71,532

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

December 31, 2014

 

 

 

 

 

Principal

 

 

 

 

 

 

 

 

Principal

 

 

 

 

 

 

 

 

amount

 

 

 

 

 

 

 

 

amount

 

 

 

 

 

Fair

 

due upon

 

 

 

 

 

Fair

 

 due upon 

 

 

 

 

    

value

    

maturity

    

Difference

 

    

value

    

maturity

    

Difference

 

 

(in thousands)

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans held for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current through 89 days delinquent

 

$

950,697 

 

$

894,924 

 

$

55,773 

 

 

$

1,068,548

 

$

1,016,314

 

$

52,234

 

90 days or more delinquent:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not in foreclosure

 

 

126,171 

 

 

128,533 

 

 

(2,362)

 

 

 

26,399

 

 

26,999

 

 

(600)

 

In foreclosure

 

 

71,016 

 

 

72,039 

 

 

(1,023)

 

 

 

6,257

 

 

6,598

 

 

(341)

 

 

$

1,147,884 

 

$

1,095,496 

 

$

52,388 

 

 

$

1,101,204

 

$

1,049,911

 

$

51,293

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

Principal

 

 

 

 

 

 

 

 

 

amount

 

 

 

 

 

 

Fair

 

due upon

 

 

 

 

 

    

value

    

maturity

    

Difference

 

 

    

(in thousands)

 

Mortgage loans held for sale:

 

 

 

 

 

 

    

 

 

 

Current through 89 days delinquent

 

$

524,665 

 

$

504,705 

 

$

19,960 

 

90 days or more delinquent:

 

 

 

 

 

 

 

 

 

 

Not in foreclosure

 

 

5,567 

 

 

5,479 

 

 

88 

 

In foreclosure

 

 

772 

 

 

660 

 

 

112 

 

 

 

$

531,004 

 

$

510,844 

 

$

20,160 

 

Financial Statement ItemsAssets Measured at Fair Value on a Nonrecurring Basis

 

Following is a summary of financial statement itemsassets that are measured at fair value on a nonrecurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

 

 

(in thousands)

 

 

 

 

 

Mortgage servicing rights at lower of amortized cost or fair value

 

$

 —

 

$

 —

 

$

1,093,242

 

$

1,093,242

 

Real estate acquired in settlement of loans

 

 

 —

 

 

 —

 

 

1,152

 

 

1,152

 

 

 

$

 —

 

$

 —

 

$

1,094,394

 

$

1,094,394

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

 

 

(in thousands)

 

Mortgage servicing rights at lower of amortized cost or fair value

 

$

 —

 

$

 —

 

$

139,505 

 

$

139,505 

 

 

 

$

 —

 

$

 —

 

$

139,505 

 

$

139,505 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

 

 

(in thousands)

 

Mortgage servicing rights at lower of amortized cost or fair value

 

$

 —

 

$

 —

 

$

136,690 

 

$

136,690 

 

 

 

$

 —

 

$

 —

 

$

136,690 

 

$

136,690 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

 

 

(in thousands)

 

 

 

 

 

Mortgage servicing rights at lower of amortized cost or fair value

 

$

 —

 

$

 —

 

$

202,991

 

$

202,991

 

 

 

$

 —

 

$

 —

 

$

202,991

 

$

202,991

 

 

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Table of Contents

The following table summarizes the total gains (losses) on assets measured at fair values on a nonrecurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

    

2014

    

2013

    

2012

 

 

 

(in thousands)

 

Mortgage servicing rights at lower of amortized cost or fair value

 

$

(5,178)

 

$

(1,644)

 

$

(2,908)

 

 

 

$

(5,178)

 

$

(1,644)

 

$

(2,908)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

    

2016

    

2015

    

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights at lower of amortized cost or fair value

 

$

(60,487)

 

$

(37,437)

 

$

(5,178)

 

Real estate acquired in settlement of loans

 

 

(86)

 

 

 —

 

 

 —

 

 

 

$

(60,573)

 

$

(37,437)

 

$

(5,178)

 

 

Fair Value of Financial Instruments Carried at Amortized Cost

 

The Company’s CashFinancing receivable from PMT, as well as its Mortgage loansAssets sold under agreements to repurchase,  NoteMortgage loan participation and sale agreements,  Notes payable,  Carried Interest due from Investment FundsObligations under capital lease , and amounts receivable from and payable to the Advised Entities are carried at amortized cost.

Cash is measured using a “Level 1” input.

 

The Company’s borrowings carried at amortized cost do not have observable inputs and the fair value is measured using management’s estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. The Company has classified these financial instruments as “Level 3” financial statement items as of December 31, 2014 and 2013fair value liabilities due to the lack of observable inputs to estimate thetheir fair value.values.

 

Management has concluded that the carrying value of the Carried Interest due from Investment Funds approximates its fair value as the balance represents the amount distributable to theThe Company at the balance sheet date assuming liquidation of the Investment Funds. Management has concluded that the fair value of the Note payable approximates the agreement’s carrying value due to the agreement’s short termFinancing receivable from PMT and variable interest rate. The Company has classified these financial instruments as “Level 3” financial statement items due to the Company’s reliance on unobservable inputs to estimate these instruments’ fair value.

The Company also carries the receivables from and payables to the Advised Entities at cost. Management has concluded that the fair value of such balances approximatesapproximate the carrying value due to thetheir short terms of such balances.and/or variable interest rates.

 

Valuation Techniques and AssumptionsInputs

 

Most of the Company’s financial assets, a portion of its MSRs and its ESS liabilityfinancing 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 ESSMSLs are “Level 3” financial statement itemsfair value assets and liabilities which require the use of unobservable inputs that are significant to the estimation of the items’ fair values. Unobservable inputs reflect the Company’s own assumptionsjudgments 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” financial statement items,fair value assets and liabilities, management has assigned the responsibility for estimating ofthe fair value of these assetsitems to specialized staff and subjects the valuation process to significant executivesenior management oversight. The Company’s Financial Analysis and Valuation group (the “FAV group”) is responsible for valuing and monitoring the Company’s investment portfolios, maintaining its valuation policies and procedures andspecialized staff responsible for estimating the fair values of “Level 3” financial statement items.fair value assets and liabilities other than IRLCs.

 

With respect to the Level 3non-IRLC “Level 3” valuations, the FAV group reports to the Company’s senior management valuation committee, which oversees and approves the valuations. The FAV group monitors the models used for valuation of the Company’s “Level 3” financial statement items,fair value assets and liabilities, including the models’ performance versus actual results, and reports those results to the Company’s senior management valuation committee. TheDuring 2016, the Company’s senior management valuation committee includes PFSI’sincluded the Company’s chief executive, financial, operating, creditbusiness development, risk and asset/liability management officers.

 

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Table of Contents

The FAV group is responsible for reporting to the Company’s senior management valuation committee on a monthly basis on the changes in the valuation of the portfolio,“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.

 

With respect to IRLCs, the Company has assigned responsibility for developing fair values to its Capital Markets Risk Management staff. The fair values developed by the Capital Markets Risk Management staff are reviewed

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Table of Contents

by the Company’s Capital Markets Operations group.

Following is a description of the techniques and inputs used in estimating the fair values of “Level 2” and “Level 3” fair value financial statement items:assets and liabilities.

 

Mortgage Loans Held for Sale

 

A substantial portionMost of the Company’s mortgage loans held for sale at fair value are saleable into active markets and are therefore categorized as “Level 2” fair value financial statement itemsassets and their fair values are determined using their quoted market or contracted selling price or market price equivalent.

 

Certain of the Company’s mortgage loans held for sale may become non-saleable into active markets due to identification of a defect by the Company or to the repurchase by the Company of a mortgage loan with an identified defect. The Company may also purchase certain delinquent government guaranteed or insured mortgage loans from Ginnie Mae guaranteed pools in its mortgage loan servicing portfolio.

The Company’s right to purchase suchdelinquent government guaranteed or insured mortgage loans arises as the result of the borrower’s failure to make payments for at least three consecutive months preceding the month of repurchase by the Company and provides an alternative to the Company’s obligation to continue advancing principal and interest at the coupon rate of the related Ginnie Mae security. Such repurchased mortgage loans may be resold to third-party investors and thereafter may be repurchased to the extent eligible for resale into a new Ginnie Mae guaranteed pool.

To the extent such mortgage loans (“early buyout 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 mortgage loan’s terms, the Company measures such mortgage loans along with other mortgage loans with identified defects using “Level 3” fair value inputs.

 

The significant unobservable inputs used in the fair value measurement of the Company’s “Level 3” fair value mortgage loans held for sale at fair value are discount rates, home price projections, voluntary prepaymentprepayment/resale speeds and total prepayment speeds. Significant changes in any of those inputs in isolation could result in a significant change to the mortgage loans’ fair value measurement. Increases in home price projections are generally accompanied by an increase in voluntary prepayment speeds.

 

Following is a quantitative summary of key “Level 3” fair value inputs used in the valuation of mortgage loans held for sale at fair value:

 

 

 

 

 

 

 

 

 

 

 

December 31,

Key inputs

 

2014

 

2013

 

    

2016

    

2015

Discount rate

    

 

    

 

 

Discount rate:

 

 

 

 

Range

 

2.3% - 9.6%

 

7.8% - 13.4%

 

 

2.6% – 8.8%

 

2.5% – 9.1%

Weighted average

 

2.4%

 

8.9%

 

 

3.0%

 

2.8%

Twelve-month projected housing price index change

 

 

 

 

 

Twelve-month projected housing price index change:

 

 

 

 

Range

 

4.2% - 5.4%

 

4.5% - 4.7%

 

 

2.0% – 4.5%

 

1.8% – 5.0%

Weighted average

 

4.5%

 

4.6%

 

 

3.7%

 

3.7%

Prepayment/resale speed (1)

 

 

 

 

 

Voluntary prepayment / resale speed (1):

 

 

 

 

Range

 

1.3% - 15.5%

 

1.6% - 5.1%

 

 

0.1% – 24.4%

 

0.6% – 20.1%

Weighted average

 

15.1%

 

4.4%

 

 

20.9%

 

16.6%

Total prepayment speed (2)

 

 

 

 

 

Total prepayment speed (2):

 

 

 

 

Range

 

2.1% - 38.1%

 

2.9% - 5.2%

 

 

0.1% – 39.8%

 

0.7% – 37.6%

Weighted average

 

35.7%

 

4.7%

 

 

34.3%

 

30.9%


(1)

Voluntary prepayment/resale speed is measured using Life Voluntary Conditional Prepayment Rate (“CPR”).

(2)

Total prepayment speed is measured using Life Total CPR.

F-38F-40


 

Table of Contents

Changes in fair value attributable to changes in instrument specific credit risk are measured by reference to the change in the respective mortgage loan’s delinquency status and performance history at period end from the later of the beginning of the period or acquisition date. Changes in fair value of mortgage loans held for sale are included in Net gains on mortgage loans held for sale at fair value in the Company’s consolidated statements of income.

 

Derivative Financial Instruments

 

Interest Rate Lock Commitments

The Company categorizes IRLCs as a “Level 3” financial statement item.fair value asset or liability. The Company estimates the fair value of an IRLC based on quoted Agency mortgage-backed securities (“MBS”)MBS prices, its estimate of the fair value of the MSRs it expects to receive in the sale of the mortgage loans and the probability that the mortgage loan will fund or be purchased (the “pull-through rate”).

 

The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rate and the MSR component of the Company’s estimate of the fair value of the mortgage loans it has committed to purchase. Significant changes in the pull-through rate or the MSR component of the IRLCs, in isolation, could result in significant changes in fair value measurement. The financial effects of changes in these assumptionsinputs 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 loans that havethe mortgage loan principal and interest payment cash flow component, which has decreased in fair value. Changes in fair value of IRLCs are included in Net gains on mortgage loans acquired for sale at fair value and may be allocated to Net mortgage loan servicing fees as a hedge of the fair value of MSRs in the consolidated statements of income.

 

Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

December 31, 

 

Key inputs

 

2014

 

2013

 

    

2016

    

2015

 

Pull-through rate

    

 

    

 

 

Pull-through rate:

 

 

 

 

 

Range

 

55.4% - 99.9%

 

62.1% - 98.1%

 

 

35.0% – 100.0%

 

54.1% – 100.0%

 

Weighted average

 

85.5%

 

81.7%

 

 

84.9%

 

90.1%

 

Mortgage servicing rights value expressed as:

 

 

 

 

 

 

 

 

 

 

Servicing fee multiple

 

 

 

 

 

Servicing fee multiple:

 

 

 

 

 

Range

 

2.0 - 5.0

 

2.0 - 5.0

 

 

1.2 – 5.9

 

1.0 – 5.8

 

Weighted average

 

3.7

 

3.7

 

 

4.3

 

4.4

 

Percentage of unpaid principal balance

 

 

 

 

 

Percentage of unpaid principal balance:

 

 

 

 

 

Range

 

0.4% - 3.1%

 

0.4% - 2.4%

 

 

0.3% – 2.8%

 

0.2% – 3.8%

 

Weighted average

 

1.2%

 

0.9%

 

 

1.3%

 

1.5%

 

 

Hedging Derivatives

 

The remaining derivative financial instruments held or issued by the Company are categorized as “Level 1” or “Level 2” financial statement items. The Company estimates the fair value of commitments to sell mortgage loans based on quoted MBS prices. These derivative financial instruments are categorized by the Company as “Level 1” fair value assets and purchase loansliabilities for those based on exchange traded market prices or as “Level 2” fair value assets and  liabilities for those based on observable MBS prices. The Company estimates the fair value of MBS options based on observedprices or interest rate volatilities in the MBS market. Changes in the fair value of IRLCs and related hedging derivatives are included in Net gains on mortgage loans heldacquired for sale at fair value,or Net mortgage loan servicing fees-Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities, as applicable, in the consolidated statements of income.

 

Mortgage Servicing Rights

 

MSRs are categorized as “Level 3” fair value financial statement items.assets. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. This approach consists of projecting net servicing cash flows discounted at a rate that

F-41


Table of Contents

management believes market participants would use in their determinations of fair value. The key inputs used in the estimation of the fair value of MSRs include the prepayment rates of the underlying mortgage loans, the applicable discount rate or pricing spread (discount rate), and the per-loan annual cost to service the respective mortgage loans. Changes in the fair value of MSRs are included in Net mortgage loan servicing feesAmortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.

 

F-39


Table of Contents

Following are the key inputs used in determining the fair value of MSRs at the time of initial recognition, excluding MSR purchases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

Year ended December 31, 

 

 

2014

 

2013

 

2012

 

 

2016

 

2015

 

2014

 

 

Fair

 

Amortized

 

Fair

 

Amortized

 

Fair

 

Amortized

 

 

Fair

 

Amortized

 

Fair

 

Amortized

 

Fair

 

Amortized

 

 

value

 

cost

 

value

 

cost

 

value

 

cost

 

    

value

    

cost

    

value

    

cost

    

value

    

cost

 

 

(Amount recognized and unpaid principal balance of underlying mortgage loans in thousands)

 

 

(Amount recognized and unpaid principal balance of underlying mortgage loans amounts in thousands)

 

MSR and pool characteristics:

    

 

    

 

    

 

    

 

    

 

    

 

 

    

 

 

 

 

 

 

 

    

 

    

 

 

Amount recognized

 

$24,698

 

$185,152

 

$14,636

 

$190,469

 

$774

 

$89,698

 

 

$17,319

 

$560,212

 

$18,013

 

$454,840

 

$24,698

 

$185,152

 

Unpaid principal balance of underlying mortgage loans

 

$1,982,505

 

$15,362,240

 

$1,055,797

 

$15,316,315

 

$17,615

 

$8,524,533

 

 

$1,452,779

 

$44,827,516

 

$1,463,150

 

$32,849,718

 

$1,982,505

 

$15,362,240

 

Weighted average servicing fee rate (in basis points)

 

33

 

31

 

33

 

29

 

28

 

27

 

 

33

 

30

 

33

 

34

 

33

 

31

 

Inputs:

 

 

 

 

 

 

 

 

 

 

 

 

 

Pricing spread (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Key inputs:

 

 

 

 

 

 

 

 

 

 

 

 

 

Pricing spread (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

Range

 

7.8% - 16.2%

 

6.8% - 15.7%

 

7.4% - 14.4%

 

5.4% - 15.9%

 

7.5% - 9.9%

 

7.5% - 11.9%

 

 

7.2%-10.5%

 

7.2%-14.4%

 

7.0% - 14.4%

 

6.8% - 16.2%

 

7.8% - 16.2%

 

6.8% - 15.7%

 

Weighted average

 

11.4%

 

10.8%

 

10.2%

 

8.5%

 

8.4%

 

9.8%

 

 

9.2%

 

9.5%

 

9.3%

 

9.2%

 

11.4%

 

10.8%

 

Annual total prepayment speed (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

Annual total prepayment speed (2):

 

 

 

 

 

 

 

 

 

 

 

 

 

Range

 

7.6% - 46.1%

 

7.6% - 47.8%

 

7.8% - 25.5%

 

7.6% - 42.5%

 

7.8% - 20.1%

 

6.7% - 17.8%

 

 

3.3%-53.8%

 

2.8%-50.9%

 

1.9% - 62.4%

 

2.5% - 50.0%

 

7.6% - 46.1%

 

7.6% - 47.8%

 

Weighted average

 

9.3%

 

8.3%

 

9.2%

 

8.8%

 

9.7%

 

8.5%

 

 

11.8%

 

9.0%

 

11.8%

 

8.9%

 

9.3%

 

8.3%

 

Life (in years)

 

 

 

 

 

 

 

 

 

 

 

 

 

Life (in years):

 

 

 

 

 

 

 

 

 

 

 

 

 

Range

 

1.5 – 7.5

 

1.4 – 7.5

 

2.5 – 7.3

 

1.5 – 7.5

 

3.6 – 7.0

 

2.8 – 7.0

 

 

0.5-11.9

 

1.3-12.9

 

1.1-12.3

 

1.3 -12.0

 

1.5 -7.5

 

1.4 -7.5

 

Weighted average

 

6.9

 

7.0

 

6.9

 

6.7

 

6.7

 

6.7

 

 

6.8

 

8.1

 

6.5

 

7.2

 

6.9

 

7.0

 

Per-loan annual cost of servicing

 

 

 

 

 

 

 

 

 

 

 

 

 

Per-loan annual cost of servicing:

 

 

 

 

 

 

 

 

 

 

 

 

 

Range

 

$53 – $100

 

$53 – $100

 

$68 – $120

 

$68 – $120

 

$68 – $100

 

$68 – $100

 

 

$68-$105

 

$68-$106

 

$59 – $101

 

$59 – $95

 

$53 – $100

 

$53 – $100

 

Weighted average

 

$86

 

$84

 

$98

 

$102

 

$78

 

$99

 

 

$88

 

$89

 

$77

 

$78

 

$86

 

$84

 


(1)

Pricing spread represents a margin that is applied to a reference interest rate’srates forward rate curve to develop periodic discount rates. The Company applies a pricing spread to the United States Dollar London Interbank Offered Rate (“LIBOR”) curve for purposes of discounting cash flows relating to MSRs.

(2)

Prepayment speed is measured using Life Total CPR.

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Table of Contents

Following is a quantitative summary of key inputs used in the valuation and assessment for impairment of the Company’s MSRs at year end and the effect on the fair value from adverse changes in those inputs (weighted averages are based upon UPB):

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

December 31, 2015

 

 

 

Fair

 

Amortized

 

Fair

 

Amortized

 

 

    

value

    

cost

    

value

    

cost

 

 

 

(Carrying value, unpaid principal balance of underlying 

 

 

 

mortgage loans and effect on fair value amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

MSR and pool characteristics:

 

 

 

 

 

 

 

 

 

Carrying value

 

$515,925

 

$1,111,747

 

$660,247

 

$751,688

 

Unpaid principal balance of underlying mortgage loans

 

$43,667,165

 

$85,509,941

 

$54,182,477

 

$56,420,227

 

Weighted average note interest rate

 

4.1%

 

3.7%

 

4.1%

 

3.8%

 

Weighted average servicing fee rate (in basis points)

 

32

 

31

 

32

 

32

 

Key inputs:

 

 

 

 

 

 

 

 

 

Pricing spread (1):

 

 

 

 

 

 

 

 

 

Range

 

7.6% – 14.9%

 

7.6% – 14.9%

 

7.2% – 14.1%

 

7.2% – 12.8%

 

Weighted average

 

10.1%

 

10.7%

 

8.9%

 

8.9%

 

Effect on fair value of (2):

 

 

 

 

 

 

 

 

 

5% adverse change

 

($9,097)

 

($22,382)

 

($11,115)

 

($13,467)

 

10% adverse change

 

($17,872)

 

($43,889)

 

($21,857)

 

($26,472)

 

20% adverse change

 

($34,516)

 

($84,464)

 

($42,283)

 

($51,183)

 

Average life (in years):

 

 

 

 

 

 

 

 

 

Range

 

1.3 – 8.6

 

1.6 – 9.4

 

1.9 – 9.0

 

1.8 – 9.1

 

Weighted average

 

6.7

 

8.1

 

6.9

 

7.4

 

Prepayment speed (3):

 

 

 

 

 

 

 

 

 

Range

 

7.0% – 46.7%

 

6.6% – 43.9%

 

5.3% – 43.8%

 

5.7% – 46.7%

 

Weighted average

 

10.3%

 

8.7%

 

9.7%

 

9.5%

 

Effect on fair value of (2):

 

 

 

 

 

 

 

 

 

5% adverse change

 

($8,818)

 

($16,636)

 

($12,475)

 

($14,360)

 

10% adverse change

 

($17,336)

 

($32,750)

 

($24,499)

 

($28,197)

 

20% adverse change

 

($33,533)

 

($63,513)

 

($47,286)

 

($54,406)

 

Annual per-loan cost of servicing:

 

 

 

 

 

 

 

 

 

Range

 

$78-$101

 

$79-$101

 

$68 – $97

 

$68 – $95

 

Weighted average

 

$92

 

$92

 

$86

 

$84

 

Effect on fair value of (2):

 

 

 

 

 

 

 

 

 

5% adverse change

 

($5,612)

 

($8,890)

 

($6,812)

 

($5,725)

 

10% adverse change

 

($11,225)

 

($17,781)

 

($13,624)

 

($11,451)

 

20% adverse change

 

($22,450)

 

($35,562)

 

($27,247)

 

($22,901)

 


(1)

The Company applies a pricing spread to the United States Dollar LIBOR curve for purposes of discounting cash flows relating to MSRs acquired as proceeds from the sale of mortgage loans.MSRs.

(2)

Prepayment speed is measured using Life Total CPR.

Following is a quantitative summary of key inputs used in the valuation of the Company’sFor MSRs carried at year end and the effect on the estimated fair value from adverse changes in those assumptions (weighted averages are based upon UPB):

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Table of Contents

Purchased MSRs Backed by Distressed Mortgage Loans

During the quarter ended June 30, 2014, the Company sold its portfolio of purchased MSRs backed by distressed mortgage loans to a non-affiliated entity. Following are the key inputs used in determining the fair value of such MSRs as of December 31, 2013:

December 31, 2013

Fair

Amortized

value

cost

(Amount recognized and unpaid

principal balance of underlying

mortgage loans in thousands)

MSR and pool characteristics:

Carrying value

$10,129

Unpaid principal balance of underlying mortgage loans

$969,794

Weighted average note interest rate

5.80%

Weighted average servicing fee rate (in basis points)

50

Inputs:

Discount rate

Range

15.3% – 15.3%

Weighted average

15.3%

Effect on fair value, of:

5%an adverse change

($251)

10% adverse change

($490)

20% adverse change

($937)

Life (in years)

Range

5.0 - 5.0

Weighted average

5.0

Prepayment speed (1)

Range

11.4% – 11.4%

Weighted average

11.4%

Effect on in one of the above-mentioned key inputs is expected to result in a reduction in fair value of:

5% adverse change

($231)

10% adverse change

($456)

20% adverse change

($898)

Per-loan annualwhich will be recognized in income. For MSRs carried at lower of amortized cost of servicing

Range

$218 – $218

Weighted average

$218

Effect onor fair value, of:

5% adverse change

($197)

10% adverse change

($393)

20% adverse change

($787)


(1)

Prepayment speed is measured using Life Voluntary CPR.

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Table of Contents

All Other MSRs

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

2014

 

2013

 

 

 

Fair

 

Amortized

 

Fair

 

Amortized

 

 

 

value

 

cost

 

value

 

cost

 

 

 

(Carrying value, unpaid principal balance of underlying 

 

 

 

mortgage loans and effect on fair value amounts in thousands)

 

MSR and pool characteristics:

    

 

    

 

    

 

    

 

 

Carrying  value

 

$325,383

 

$405,445

 

$214,784

 

$258,751

 

Unpaid principal balance of underlying mortgage loans

 

$30,945,000

 

$33,745,613

 

$22,469,179

 

$22,499,847

 

Weighted average note interest rate

 

4.24%

 

3.82%

 

4.48%

 

3.65%

 

Weighted average servicing fee rate (in basis points)

 

31

 

30

 

32

 

29

 

Inputs:

 

 

 

 

 

 

 

 

 

Pricing spread (1) (2)

 

 

 

 

 

 

 

 

 

Range

 

2.9% – 21.3%

 

6.3% – 15.3%

 

2.9% – 18.0%

 

6.3% – 14.5%

 

Weighed average

 

9.2%

 

9.7%

 

7.5%

 

8.7%

 

Effect on fair value of:

 

 

 

 

 

 

 

 

 

5% adverse change

 

($5,550)

 

($8,710)

 

($3,551)

 

($5,312)

 

10% adverse change

 

($10,908)

 

($17,083)

 

($6,900)

 

($10,395)

 

20% adverse change

 

($21,084)

 

($32,890)

 

($13,305)

 

($20,039)

 

Average life (in years)

 

 

 

 

 

 

 

 

 

Range

 

0.4 – 8.2

 

1.6 – 7.3

 

0.1 – 14.4

 

1.5 – 7.3

 

Weighed average

 

5.8

 

6.8

 

6.2

 

7.0

 

Prepayment speed (1) (3) 

 

 

 

 

 

 

 

 

 

Range

 

7.6% – 60.5%

 

7.6% – 42.8%

 

7.8% – 50.8%

 

7.6% – 42.5%

 

Weighed average

 

11.2%

 

8.5%

 

9.7%

 

8.0%

 

Effect on fair value of:

 

 

 

 

 

 

 

 

 

5% adverse change

 

($7,052)

 

($7,359)

 

($4,622)

 

($4,615)

 

10% adverse change

 

($13,835)

 

($14,494)

 

($9,073)

 

($9,097)

 

20% adverse change

 

($26,654)

 

($28,132)

 

($17,500)

 

($17,684)

 

Annual per-loan cost of servicing (1)

 

 

 

 

 

 

 

 

 

Range

 

$59 – $109

 

$59 – $81

 

$68 – $115

 

$68 – $100

 

Weighed average

 

$76

 

$75

 

$87

 

$99

 

Effect on fair value of:

 

 

 

 

 

 

 

 

 

5% adverse change

 

($2,910)

 

($2,992)

 

($2,817)

 

($2,609)

 

10% adverse change

 

($5,819)

 

($5,983)

 

($5,633)

 

($5,217)

 

20% adverse change

 

($11,638)

 

($11,967)

 

($11,266)

 

($10,434)

 


(1)

The effect on value of an adverse change in one of the above-mentioned key inputs may result in recognition of MSR impairment. The extent of the recognized MSR impairment recognized will depend on the relationship of fair value to the carrying value of such MSRs.

(2)

Pricing spread represents a margin that is applied to a reference interest rate’s forward curve to develop periodic discount rates. The Company applies a pricing spread to the United States Dollar LIBOR curve for purposes of discounting cash flows relating to MSRs acquired as proceeds from the sale of mortgage loans and purchased MSRs not backed by pools of distressed mortgage loans.

(3)

Prepayment speed is measured using Life Total CPR.

 

The preceding 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

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Table of Contents

accuracy of various models and assumptionsinputs used; and do not incorporate other factors that would affect the Company’s

F-43


Table of Contents

overall financial performance in such scenarios,events, including operational adjustments made by management to account for changing circumstances. For these reasons, the preceding estimates should not be viewed as earnings forecasts.

 

ExcessMortgage Servicing Spread Financing at Fair ValueLiabilities

 

The Company categorizes ESS financingMSLs are categorized as a “Level 3” financial statement item.fair value liabilities. The Company uses a discounted cash flow approach to estimate the fair value of MSLs. This approach consists of projecting net servicing cash flows discounted at a rate that management believes market participants would use in their determinations of fair value. The key inputs used in the estimation of the fair value of MSLs include the prepayment rates of the underlying mortgage loans, the applicable pricing spread (discount rate), and the per-loan annual cost to service the respective mortgage loans. Changes in the fair value of MSLs are included in Net servicing feesAmortization, 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:

 

 

 

 

 

 

 

December 31, 

 

 

2016

 

2015

MSL and pool characteristics:

 

 

    

 

Carrying value (in thousands)

 

$15,192

 

$1,399

Unpaid principal balance of underlying mortgage loans
(in thousands)

 

$2,074,896

 

$806,897

Weighted average servicing fee rate (in basis points)

 

25

 

25

Key inputs:

 

 

 

 

Pricing spread (1)

 

8.0%

 

6.4%

Average life (in years)

 

3.7

 

3.4

Prepayment speed (2) 

 

31.7%

 

33.1%

Annual per-loan cost of servicing

 

$497

 

$258


(1)

The Company applies a pricing spread to the United States Dollar LIBOR curve for purposes of discounting cash  flows relating to MSLs.

(2)

Prepayment speed is measured using Life Total CPR.

Excess Servicing Spread Financing at Fair Value

The Company categorizes ESS financing.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 used to measure MSRs except that certain inputs relating to the cost to service the mortgage loans underlying the MSR and certain ancillary income are not included as these cash flows do not accrue to the holder of the ESS. The key inputs used in the estimation of ESS fair value include pricing spread (discount rate) and prepayment speed. Significant changes to either of those inputs in isolation could result in a significant change in the ESS fair value.value of ESS. Changes in these key assumptionsinputs are not necessarily directly related.

 

ESS is generally subject to fair value increases when mortgage interest rates increase. Increasing mortgage interest rates normally slow mortgage refinancing activity. Decreased refinancing activity increases the life of the mortgage loans underlying the ESS, thereby increasing ESS’its fair value, which is the liability owed to PMT. Increases in the fair value of ESS financing decrease income and are included in Amortization,Net mortgage loan servicing fees-Amortization, impairment and change in fair value of mortgage servicing rights. and mortgage servicing liabilities.

 

Interest expense for ESS is accrued using the interest method based upon the expected cash flows from the ESS through the expected life

F-44


Table of the underlying mortgage loans. Other changes in fair value are recorded in Amortization, impairment and change in fair value of mortgage servicing rights.Contents

Following are the key inputs used in determining the fair value of ESS financing:

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

December 31, 

 

Key inputs

    

2014

    

2013

 

Unpaid principal balance of underlying loans (in thousands)

    

$28,227,340

    

$20,512,659

 

 

2016

    

2015

 

 

 

 

 

 

Carrying value (in thousands)

 

$288,669

    

$412,425

 

ESS and pool characteristics:

 

 

 

 

 

Unpaid principal balance of underlying mortgage loans (in thousands)

 

$32,376,359

    

$51,966,405

 

Average servicing fee rate (in basis points)

 

31

 

32

 

 

34

 

32

 

Average excess servicing spread (in basis points)

 

16

 

16

 

 

19

 

17

 

Pricing spread (1)

 

 

 

 

 

Key inputs:

 

 

 

 

 

Pricing spread (1):

 

 

 

 

 

Range

 

1.7% - 12.0%

 

2.8% - 14.4%

 

 

3.8% – 4.8%

 

4.8% – 6.5%

 

Weighted average

 

5.3%

 

5.4%

 

 

4.4%

 

5.7%

 

Average life (in years)

 

 

 

 

 

Average life (in years):

 

 

 

 

 

Range

 

0.4 - 7.3

 

0.9 - 8.0

 

 

1.4 – 8.6

 

1.4 – 9.0

 

Weighted average

 

5.8

 

6.1

 

 

6.8

 

6.9

 

Annualized prepayment speed (2)

 

 

 

 

 

Annualized prepayment speed (2):

 

 

 

 

 

Range

 

7.6% - 74.6%

 

7.7% - 48.6%

 

 

7.0% – 41.3%

 

5.2% – 52.4%

 

Weighted average

 

11.2%

 

9.7%

 

 

10.5%

 

9.6%

 


(1)

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 LIBOR curve for purposes of discounting cash flows relating to ESS.

(2)

Prepayment speed is measured using Life Total CPR.

 

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Table of Contents

Note 9—Mortgage Loans Held for Sale at Fair Value

 

Mortgage loans held for sale at fair value include the following:

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

2014

 

2013

 

 

 

(in thousands)

 

Government-insured or guaranteed

    

$

866,148 

    

$

482,066 

 

Conventional conforming

 

 

66,229 

 

 

45,005 

 

Jumbo

 

 

5,599 

 

 

 —

 

Delinquent mortgage loans purchased from Ginnie Mae pools serviced by the Company

 

 

206,331 

 

 

 —

 

Mortgage loans repurchased pursuant to representations and warranties

 

 

3,577 

 

 

3,933 

 

 

 

$

1,147,884 

 

$

531,004 

 

Fair value of mortgage loans pledged to secure mortgage loans sold under agreements to repurchase

 

$

976,772 

 

$

512,350 

 

Fair value of mortgage loans pledged to secure mortgage loan participation and sale agreement

 

$

148,133 

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

December 31, 

 

 

 

2016

    

2015

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Government-insured or guaranteed

 

$

1,984,020

    

$

992,805

 

Conventional conforming

 

 

141,524

 

 

59,868

 

Purchased from Ginnie Mae pools serviced by the Company

 

 

40,437

 

 

42,600

 

Repurchased pursuant to representations and warranties

 

 

6,834

 

 

5,931

 

 

 

$

2,172,815

 

$

1,101,204

 

Fair value of mortgage loans pledged to secure:

 

 

 

 

 

 

 

Assets sold under agreements to repurchase

 

$

1,422,255

 

$

833,748

 

Mortgage loan participation and sale agreements

 

 

702,919

 

 

245,741

 

 

 

$

2,125,174

 

$

1,079,489

 

 

 

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Note 10—Derivative Financial Instruments

 

The Company is exposed to fair value risk relative to its mortgage loans held for sale as well as to its IRLCs and MSRs. The Company bears fair value risk from the time an IRLC is made to PMT or a loan applicant to the time the mortgage loan is sold. The Company is exposed to loss in fair value of its IRLCs and mortgage loans held for sale when mortgage rates increase. The Company is exposed to loss in fair value of its MSRs when interest rates decrease.

The Company engages in interest rate risk management activities in an effort to reduce the variability of earnings caused by changes in market interest rates. To manage this fair value risk resulting from interest rate risk, the Company uses derivative financial instruments acquired with the intention of reducing the risk that changes in market interest rates will result in unfavorable changes in the fair value of the Company’s IRLCs, inventory of mortgage loans held for sale and MSRs.

The Company does not use derivative financial instruments for purposes other than in support of its risk management activities other than IRLCs, which are generated in the normal course of business when the Company commits to purchase or originate mortgage loans held for sale. The Company records all derivative financial instruments at fair value and records changes in fair value in current period income.

F-44


Table of Contents

The Company had the following derivative financial instruments recorded on its consolidated balance sheets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

December 31, 2013

 

 

December 31, 2016

 

December 31, 2015

 

 

 

 

Fair value

 

 

 

Fair value

 

 

 

 

Fair value

 

 

 

Fair value

 

 

Notional

 

Derivative

 

Derivative

 

Notional

 

Derivative

 

Derivative

 

 

Notional

 

Derivative

 

Derivative

 

Notional

 

Derivative

 

Derivative

 

Instrument

    

amount

    

assets

    

liabilities

    

amount

    

assets

    

liabilities

 

    

amount

    

assets

    

liabilities

    

amount

    

assets

    

liabilities

 

 

(in thousands)

 

 

(in thousands)

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Free-standing derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

1,765,597 

 

$

33,353 

 

$

952 

 

971,783 

 

$

8,964 

 

$

2,203 

 

 

4,279,611

 

$

65,848

 

$

6,457

 

3,487,366

 

$

45,885

 

$

2,112

 

Forward purchase contracts

 

2,634,218 

 

 

9,060 

 

 

141 

 

1,418,527 

 

 

416 

 

 

6,542 

 

 

12,746,191

 

 

77,905

 

 

16,914

 

5,254,293

 

 

4,181

 

 

9,004

 

Forward sales contracts

 

3,901,851 

 

 

320 

 

 

16,110 

 

2,659,000 

 

 

18,762 

 

 

504 

 

 

16,577,942

 

 

28,324

 

 

85,035

 

6,230,811

 

 

4,965

 

 

7,497

 

MBS put options

 

340,000 

 

 

476 

 

 

 —

 

185,000 

 

 

665 

 

 

 —

 

 

1,175,000

 

 

3,934

 

 

 —

 

1,275,000

 

 

404

 

 

 —

 

MBS call options

 

 —

 

 

 —

 

 

 —

 

105,000 

 

 

91 

 

 

 —

 

 

1,600,000

 

 

217

 

 

 —

 

 —

 

 

 —

 

 

 —

 

Put options on interest rate futures purchase contracts

 

755,000 

 

 

862 

 

 

 —

 

 

 

 

 —

 

 

 —

 

 

1,125,000

 

 

3,109

 

 

 —

 

1,650,000

 

 

1,832

 

 

203

 

Call options on interest rate futures purchase contracts

 

630,000 

 

 

2,193 

 

 

 —

 

 

 

 

 —

 

 

 —

 

 

900,000

 

 

203

 

 

 —

 

600,000

 

 

1,555

 

 

47

 

Put options on interest rate futures sale contracts

 

50,000 

 

 

 —

 

 

 

 

 

 

 —

 

 

 —

 

Interest rate swap futures purchase contracts

 

200,000

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

Total derivatives before netting

 

 

 

 

46,264 

 

 

17,211 

 

 

 

 

28,898 

 

 

9,249 

 

 

 

 

 

179,540

 

 

108,406

 

 

 

 

58,822

 

 

18,863

 

Netting

 

 

 

 

(7,807)

 

 

(10,698)

 

 

 

 

(7,358)

 

 

(6,787)

 

 

 

 

 

(96,635)

 

 

(86,044)

 

 

 

 

(8,542)

 

 

(9,780)

 

 

 

 

$

38,457 

 

$

6,513 

 

 

 

$

21,540 

 

$

2,462 

 

 

 

 

$

82,905

 

$

22,362

 

 

 

$

50,280

 

$

9,083

 

Margin deposits with (collateral received from) derivative counterparties

 

 

 

$

(2,891)

 

 

 

 

 

 

$

571 

 

 

 

 

Deposits placed with (received from) derivative counterparties, net

 

 

 

$

10,591

 

 

 

 

 

 

$

(1,238)

 

 

 

 

 

The following table summarizes the notional value activity for derivative contracts used in the Company’s hedging activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2016

 

 

 

Balance

 

                            

 

                            

 

Balance

 

 

 

beginning of

 

 

 

Dispositions/

 

end of

 

Instrument

    

year

    

Additions

    

expirations

    

year

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Forward purchase contracts

 

5,254,293

 

210,412,697

 

(202,920,799)

 

12,746,191

 

Forward sale contracts

 

6,230,811

 

262,202,884

 

(251,855,753)

 

16,577,942

 

MBS put options

 

1,275,000

 

19,225,000

 

(19,325,000)

 

1,175,000

 

MBS call options

 

 —

 

1,600,000

 

 —

 

1,600,000

 

Put options on interest rate futures purchase contracts

 

1,650,000

 

15,331,000

 

(15,856,000)

 

1,125,000

 

Call options on interest rate futures purchase contracts

 

600,000

 

5,687,500

 

(5,387,500)

 

900,000

 

Put options on interest rate futures sale contracts

 

 —

 

9,436,000

 

(9,436,000)

 

 —

 

Call options on interest rate futures sale contracts

 

 —

 

550,000

 

(550,000)

 

 —

 

Treasury futures purchase contracts

 

 —

 

585,800

 

(585,800)

 

 —

 

Treasury futures sale contracts

 

 —

 

585,800

 

(585,800)

 

 —

 

Interest rate swap futures purchase contracts

 

 —

 

400,000

 

(200,000)

 

200,000

 

Interest rate swap futures sale contracts

 

 —

 

200,000

 

(200,000)

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2014

 

 

 

Balance

 

                            

 

                            

 

                            

 

 

 

beginning

 

 

 

Dispositions/

 

Balance

 

Period/Instrument

  

      of period      

   

Additions

   

expirations

   

end of period

 

 

 

(in thousands)

 

Forward purchase contracts

 

1,418,527 

 

45,827,559 

 

(44,611,868)

 

2,634,218 

 

Forward sale contracts

 

2,659,000 

 

63,117,808 

 

(61,874,957)

 

3,901,851 

 

MBS put options

 

185,000 

 

1,730,000 

 

(1,575,000)

 

340,000 

 

MBS call options

 

105,000 

 

590,000 

 

(695,000)

 

 —

 

Put options on interest rate futures purchase contracts

 

 —

 

2,997,500 

 

(2,242,500)

 

755,000 

 

Call options on interest rate futures purchase contracts

 

 —

 

2,385,000 

 

(1,755,000)

 

630,000 

 

Put options on interest rate futures sale contracts

 

 —

 

425,000 

 

(375,000)

 

50,000 

 

Call options on interest rate futures sale contracts

 

 —

 

1,025,000 

 

(1,025,000)

 

 —

 

Treasury futures purchase contracts

 

 —

 

148,900 

 

(148,900)

 

 —

 

Treasury futures sale contracts

 

 —

 

170,600 

 

(170,600)

 

 —

 

Eurodollar futures purchase contracts

 

 —

 

26,000 

 

(26,000)

 

 —

 

Eurodollar futures sale contracts

 

 —

 

26,000 

 

(26,000)

 

 —

 

F-45F-46


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2013

 

 

Year ended December 31, 2015

 

 

Balance

 

                            

 

                            

 

                            

 

 

Balance

 

                            

 

                            

 

Balance

 

 

beginning

 

 

 

Dispositions/

 

Balance

 

 

beginning of

 

 

 

Dispositions/

 

end of

 

Period/Instrument

  

      of period      

   

Additions

   

expirations

   

end of period

 

Instrument

    

year

    

Additions

    

expirations

    

year

 

 

(in thousands)

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Forward purchase contracts

 

1,021,981 

 

43,449,699 

 

(43,053,153)

 

1,418,527 

 

 

2,634,218

 

103,571,212

 

(100,951,137)

 

5,254,293

 

Forward sale contracts

 

2,621,948 

 

63,655,600 

 

(63,618,548)

 

2,659,000 

 

 

3,901,851

 

137,061,118

 

(134,732,158)

 

6,230,811

 

MBS put options

 

500,000 

 

2,520,000 

 

(2,835,000)

 

185,000 

 

 

340,000

 

3,902,500

 

(2,967,500)

 

1,275,000

 

MBS call options

 

 —

 

2,205,000 

 

(2,100,000)

 

105,000 

 

 

 —

 

160,000

 

(160,000)

 

 —

 

Put options on interest rate futures purchase contracts

 

755,000

 

8,790,000

 

(7,895,000)

 

1,650,000

 

Call options on interest rate futures purchase contracts

 

630,000

 

6,055,000

 

(6,085,000)

 

600,000

 

Put options on interest rate futures sale contracts

 

50,000

 

50,000

 

(100,000)

 

 —

 

Call options on interest rate futures sale contracts

 

 —

 

35,100

 

(35,100)

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2012

 

 

Year ended December 31, 2014

 

 

Balance

 

                            

 

                            

 

                            

 

 

Balance

 

                            

 

                            

 

Balance

 

 

beginning

 

 

 

Dispositions/

 

Balance

 

 

beginning of

 

 

 

Dispositions/

 

end of

 

Period/Instrument

  

      of period      

   

Additions

   

expirations

   

end of period

 

Instrument

    

year

    

Additions

    

expirations

    

year

 

 

(in thousands)

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Forward purchase contracts

 

130,900 

 

19,425,777 

 

(18,534,696)

 

1,021,981 

 

 

1,418,527

 

45,827,559

 

(44,611,868)

 

2,634,218

 

Forward sale contracts

 

510,569 

 

29,394,503 

 

(27,283,124)

 

2,621,948 

 

 

2,659,000

 

63,117,808

 

(61,874,957)

 

3,901,851

 

MBS put options

 

29,000 

 

2,098,000 

 

(1,627,000)

 

500,000 

 

 

185,000

 

1,730,000

 

(1,575,000)

 

340,000

 

MBS call options

 

3,000 

 

85,000 

 

(88,000)

 

 —

 

 

105,000

 

590,000

 

(695,000)

 

 —

 

Put options on interest rate futures purchase contracts

 

 —

 

2,997,500

 

(2,242,500)

 

755,000

 

Call options on interest rate futures purchase contracts

 

 —

 

2,385,000

 

(1,755,000)

 

630,000

 

Put options on interest rate futures sale contracts

 

 —

 

425,000

 

(375,000)

 

50,000

 

Call options on interest rate futures sale contracts

 

 —

 

1,025,000

 

(1,025,000)

 

 —

 

Treasury futures purchase contracts

 

 —

 

148,900

 

(148,900)

 

 —

 

Treasury futures sale contracts

 

 —

 

170,600

 

(170,600)

 

 —

 

Eurodollar futures purchase contracts

 

 —

 

26,000

 

(26,000)

 

 —

 

Eurodollar futures sales contracts

 

 —

 

26,000

 

(26,000)

 

 —

 

 

TheFollowing are the gains (losses) recognized by the Company recorded net (losses) gains on derivative financial instruments used to hedge IRLCs and mortgage loans held for sale at fair value totaling $(109.8) million, $110.3 million and $(68.0) million for the years ended December 31, 2014, 2013 and 2012, respectively. Derivativeincome statement line items where such gains and losses used to hedge IRLCs and mortgage loans held for sale at fair value are included in Net gains on mortgage loans held for sale at fair value in the Company’s consolidated statements of income.included:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

Hedged item

    

Income statement line

    

2016

    

2015

 

2014

 

 

 

 

(in thousands)

Interest rate lock commitments and mortgage loans held for sale

 

Net gains (losses) on mortgage loans held for sale

 

$

20,619

 

$

(48,960)

 

$

(109,771)

Mortgage servicing rights

 

Net mortgage loan servicing fees

 

$

26,405

 

$

(7,717)

 

$

26,840

 

The Company recorded net gains (losses) on derivatives used to hedge fair value changes of MSRs totaling $26.8 million, $(1.3) million and $1.3 million for the years ended December 31, 2014, 2013 and 2012, respectively. Gains and losses on derivative financial instruments used to hedge fair value changes of MSRs are included in Amortization, impairment and change in fair value of mortgage servicing rights in the Company’s consolidated statements of income.

F-46F-47


 

Table of Contents

Note 11—Mortgage Servicing Rights

Carried at Fair Value:

 

The activity in MSRs carried at fair value is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

Year ended December 31,

 

 

2016

 

2015

 

2014

 

 

2014

 

2013

 

2012

 

 

(in thousands)

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of year

    

$

224,913 

    

$

19,798 

    

$

25,698 

 

    

$

660,247

    

$

325,383

    

$

224,913

 

Additions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases

 

 

135,480 

 

 

195,871 

 

 

 —

 

 

 

146

 

 

382,824

 

 

135,480

 

Mortgage servicing rights resulting from mortgage loan sales

 

 

24,698 

 

 

14,636 

 

 

774 

 

 

 

17,319

 

 

18,013

 

 

24,698

 

 

 

160,178 

 

 

210,507 

 

 

774 

 

 

 

17,465

 

 

400,837

 

 

160,178

 

Sales

 

 

(10,881)

 

 

(550)

 

 

 —

 

 

 

 —

 

 

 —

 

 

(10,881)

 

Change in fair value due to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in valuation inputs or assumptions used in valuation model (1)

 

 

(9,447)

 

 

659 

 

 

(1,550)

 

Changes in valuation inputs used in valuation model (1)

 

 

(80,244)

 

 

7,352

 

 

(9,447)

 

Other changes in fair value (2)

 

 

(39,380)

 

 

(5,501)

 

 

(5,124)

 

 

 

(81,543)

 

 

(73,325)

 

 

(39,380)

 

Total change in fair value

 

 

(48,827)

 

 

(4,842)

 

 

(6,674)

 

 

 

(161,787)

 

 

(65,973)

 

 

(48,827)

 

Balance at end of year

 

$

325,383 

 

$

224,913 

 

$

19,798 

 

 

$

515,925

 

$

660,247

 

$

325,383

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

 

 

2016

 

2015

 

 

 

 

 

(in thousands)

 

 

 

 

Fair value of mortgage servicing rights pledged to secure:

 

 

 

 

 

 

 

 

 

 

Assets sold under agreements to repurchase

 

$

403,099

 

$

37,705

 

 

 

 

Note payable

 

 

106,748

 

 

20,881

 

 

 

 

 

$

509,847

 

$

58,586

 

 

 

 


(1)

Principally reflects changes in discount rates and prepayment speed assumptions,inputs, primarily due to changes in market interest rates.

(2)

Represents changes due to realization of cash flows.

 

F-48


Table of Contents

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,

 

 

Year ended December 31,

 

    

2014

    

2013

    

2012

 

    

2016

    

2015

    

2014

 

 

(in thousands)

 

 

(in thousands)

 

Amortized cost:

 

 

                  

 

 

                  

 

 

                  

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of year

 

$

263,373 

 

$

92,155 

 

$

6,496 

 

 

$

798,925

 

$

415,245

 

$

263,373

 

Mortgage servicing rights resulting from mortgage loan sales

 

 

185,152 

 

 

190,469 

 

 

89,698 

 

 

 

560,212

 

 

454,840

 

 

185,152

 

Amortization

 

 

(33,280)

 

 

(19,251)

 

 

(4,039)

 

 

 

(139,666)

 

 

(71,160)

 

 

(33,280)

 

Application of valuation allowance to write down mortgage servicing rights with other-than-temporary impairment

 

 

 —

 

 

 —

 

 

 —

 

 

 

(12,777)

 

 

 —

 

 

 —

 

Balance at end of year

 

 

415,245 

 

 

263,373 

 

 

92,155 

 

 

 

1,206,694

 

 

798,925

 

 

415,245

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of year

 

 

(4,622)

 

 

(2,978)

 

 

(70)

 

 

 

(47,237)

 

 

(9,800)

 

 

(4,622)

 

Additions

 

 

(5,178)

 

 

(1,644)

 

 

(2,908)

 

 

 

(60,487)

 

 

(37,437)

 

 

(5,178)

 

Application of valuation allowance to write down mortgage servicing rights with other-than-temporary impairment

 

 

 —

 

 

 —

 

 

 —

 

 

 

12,777

 

 

 —

 

 

 —

 

Balance at end of year

 

 

(9,800)

 

 

(4,622)

 

 

(2,978)

 

 

 

(94,947)

 

 

(47,237)

 

 

(9,800)

 

Mortgage servicing rights, net

 

$

405,445 

 

$

258,751 

 

$

89,177 

 

 

$

1,111,747

 

$

751,688

 

$

405,445

 

Fair value of mortgage servicing rights at end of year

 

$

416,802 

 

$

269,422 

 

$

91,028 

 

 

$

1,112,302

 

$

766,345

 

$

416,802

 

Fair value of mortgage servicing rights at beginning of year

 

 

 

 

 

 

 

$

6,465 

 

 

$

766,345

 

$

416,802

 

$

269,422

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 

 

 

 

 

 

2016

 

2015

 

 

 

 

 

(in thousands)

 

 

 

 

Fair value of mortgage servicing rights pledged to secure:

 

 

 

 

 

 

 

 

 

 

Assets sold under agreements to repurchase

 

$

1,076,223

 

$

744,974

 

 

 

 

Note payable

 

 

31,601

 

 

 —

 

 

 

 

 

$

1,107,824

 

$

744,974

 

 

 

 

 

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Table of Contents

The following table summarizes the Company’s estimate of future amortization of its existing MSRs. This projection was developed using the inputs used by management in its December 31, 20142016 valuation of MSRs. The inputs underlying the following estimate will change as market conditions and portfolio composition and behavior change, causing both actual and projected amortization levels to change over time.

 

 

 

 

 

 

 

 

Estimated MSR

 

Year ending December 31, 

    

amortization

 

 

 

(in thousands)

 

2017

 

$

134,697

 

2018

 

 

123,738

 

2019

 

 

112,616

 

2020

 

 

101,852

 

2021

 

 

91,814

 

Thereafter

 

 

641,977

 

 

 

$

1,206,694

 

 

 

 

 

 

 

 

 

Estimated MSR

 

Year period ending December 31,

    

amortization

 

 

 

(in thousands)

 

2015

 

$

40,018 

 

2016

 

 

40,428 

 

2017

 

 

38,500 

 

2018

 

 

35,537 

 

2019

 

 

32,525 

 

Thereafter

 

 

228,237 

 

 

 

$

415,245 

 

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Servicing fees relating to MSRs are recorded in Net mortgage loan servicing fees—Loan servicing fees—From non-affiliates on the consolidated statements of income; late charges and other ancillary fees relating to MSRs are recorded in Net mortgage loan servicing fees—Loan servicing fees—Ancillary and other fees on the consolidated statements of income. The fees are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

Year ended December 31,

 

 

2016

    

2015

    

2014

 

    

2014

    

2013

    

2012

 

 

(in thousands)

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Contractual servicing fees

 

$

173,005 

 

$

61,523 

 

$

20,673 

 

 

$

385,633

 

$

290,474

 

$

173,005

 

Ancillary and other fees:

 

 

                  

 

 

                  

 

 

                  

 

 

 

                  

 

                  

 

                  

 

Late charges

 

 

4,320 

 

 

1,998 

 

 

948 

 

 

 

19,341

 

5,835

 

4,320

 

Other

 

 

1,257 

 

 

549 

 

 

276 

 

 

 

4,706

 

 

2,266

 

 

1,257

 

 

$

178,582 

 

$

64,070 

 

$

21,897 

 

 

$

409,680

 

$

298,575

 

$

178,582

 

 

Mortgage Servicing Liabilities at Fair Value:

 

The activity in mortgage servicing liability carried at fair value is summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

    

2016

    

2015

    

2014

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of year

 

$

1,399

 

$

6,306

 

$

 —

 

Mortgage servicing liabilities accepted for cash

 

 

10,139

 

 

 —

 

 

 —

 

Mortgage servicing liabilities resulting from mortgage loan sales

 

 

14,991

 

 

20,442

 

 

1,965

 

Changes in fair value due to:

 

 

 

 

 

 

 

 

 

 

Changes in valuation inputs used in valuation model (1)

 

 

5,264

 

 

(15,653)

 

 

8,005

 

Other changes in fair value (2) 

 

 

(16,601)

 

 

(9,696)

 

 

(3,664)

 

Total change in fair value

 

 

(11,337)

 

 

(25,349)

 

 

4,341

 

Balance at end of year

 

$

15,192

 

$

1,399

 

$

6,306

 


 

 

(1)

Principally reflects changes in discount rates and prepayment speed inputs, primarily due to changes in market interest rates.

(2)

Year ended

December 31,

2014

(in thousands)

Amortized cost:

Balance at beginningRepresents changes due to realization of year

$

 —

Accrual of mortgage servicing liabilities resulting from mortgage loan sales

1,965 

Change in fair value

4,341 

Balance at end of year

$

6,306 

cash flows.

 

 

 

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Note 12—Carried Interest Due from Investment Funds

The activity in the Company’s Carried Interest due from Investment Funds is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

Year ended December 31,

 

 

2016

    

2015

    

2014

 

    

2014

    

2013

    

2012

 

 

(in thousands)

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of year

 

$

61,142 

 

$

47,723 

 

$

37,250 

 

 

$

69,926

 

$

67,298

 

$

61,142

 

Carried Interest recognized during the year

 

 

6,156 

 

 

13,419 

 

 

10,473 

 

 

 

980

 

 

2,628

 

 

6,156

 

Proceeds received during the year

 

 

 —

 

 

 —

 

 

 —

 

Balance at end of year

 

$

67,298 

 

$

61,142 

 

$

47,723 

 

 

$

70,906

 

$

69,926

 

$

67,298

 

 

The amount of the Carried Interest that will be received by the Company depends on the Investment Funds’ future performance. As a result, the amount of Carried Interest recorded by the Company is based on the cash flows that would be produced assuming termination of the Investment Funds at periodyear end and may be reduced in future periods based on the performance of the Investment Funds in those periods. However, the Company is not required to pay

F-50


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guaranteed returns to the Investment Funds and the amount of any reduction to Carried Interest will be limited to the extent of amounts previously recognized.

 

Management expects the Carried Interest to be collected by the Company when the Investment Funds liquidate. The commitment period for the Investment Funds ended on December 31, 2011. The Investment Fund limited liability company and limited partnership agreements specify that the funds will continue in existence through December 31, 2016, subject2017, as a result of PCM’s election to exercise the first of such three one-year extensions by PCM at its discretion.

Note 13—Investmentprovided in PennyMac Mortgage Investment Trust at Fair Value

Following is a summary of Change in fair value of investment intheir limited liability company and dividends received from PennyMac Mortgage Investment Trust:limited partnership agreements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

    

2014

    

2013

    

2012

 

 

 

(in thousands)

 

Dividends

 

$

134 

 

$

216 

 

$

167 

 

Change in fair value

 

 

(140)

 

 

(175)

 

 

650 

 

 

 

$

(6)

 

$

41 

 

$

817 

 

Fair value of PennyMac Mortgage Investment Trust shares at year end

 

$

1,582 

 

$

1,722 

 

$

1,897 

 

 

Note 14—13—Furniture, Fixtures, Equipment and Building Improvements

Furniture, fixtures, equipment and building improvements is summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 

 

 

December 31, 

 

 

2014

 

2013

 

 

2016

 

2015

 

    

(in thousands)

 

    

(in thousands)

 

Furniture, fixtures, equipment and building improvements

 

$

17,740 

    

$

13,128 

 

 

$

48,713

    

$

26,862

 

Less: Accumulated depreciation and amortization

 

 

(6,401)

 

 

(3,291)

 

 

 

(17,392)

 

 

(10,551)

 

 

$

11,339 

 

$

9,837 

 

 

$

31,321

 

$

16,311

 

Fixed assets pledged to secure obligations under capital lease

 

$

25,134

 

$

14,034

 

 

Depreciation and amortization expense totaled $3.1 million, $1.8 million and $846,000 for the years ended December 31, 2014, 2013 and 2012, respectively, of which $2.1 million, $1.4 million and $590,000, respectively, were allocated to PMT as called for in its management agreement.expenses are summarized below:

F-49


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

 

2016

 

2015

 

2014

 

 

    

(in thousands)

 

Depreciation and amortization expenses

 

$

6,842

    

$

4,149

 

$

3,111

 

Less: Depreciation and amortization allocated to PMT(1)

 

 

(1,350)

 

 

(2,051)

 

 

(2,066)

 

Depreciation and amortization expenses included in Other expense

 

$

5,492

 

$

2,098

 

$

1,045

 


Table of Contents

(1)

The Company’s management agreement with PMT provides for allocation by the Company of certain common overhead cost to PMT.

Note 15—14—Capitalized Software

Capitalized software is summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 

 

 

December 31, 

 

    

2014

 

2013

 

    

2016

 

2015

 

 

(in thousands)

 

 

(in thousands)

 

Cost

 

$

2,138 

    

$

2,015 

 

 

$

13,457

    

$

4,920

 

Less: Accumulated amortization

 

 

(1,571)

 

 

(1,251)

 

 

 

(2,252)

 

 

(1,895)

 

 

$

567 

 

$

764 

 

 

$

11,205

 

$

3,025

 

Capitalized software pledged to secure obligation under capital lease

 

$

515

 

$

783

 

 

Software amortization expenses totaled $320,000,  $374,000$357,000, $324,000 and $264,000$320,000 for the years ended December 31, 2014, 20132016, 2015 and 2012,2014, respectively.

Note 16—15—Borrowings

As of December 31, 2014, the Company maintained six borrowing facilities: four facilities that provide funding for sales of mortgage loans under agreements to repurchase; one facility that provides for sales of mortgage loan participation certificates; and one note payable secured by MSRs and servicing advances made relating to certain loans in the Company’s loan servicing portfolio.

 

The borrowing facilities described throughout this Note 15 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, 2014.2016.

 

Mortgage Loans

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Table of Contents

Assets Sold Under AgreementAgreements to Repurchase

 

The Company has multiple borrowing facilities in the form of asset sales under agreements to repurchase. These borrowing facilities are secured by mortgage loans held for sale are in the form of loan saleat fair value or participation certificates backed by MSRs. Eligible mortgage loans and repurchase agreements. Eligible loansparticipation certificates backed by MSRs are sold at advance rates based on the loan type.fair value of the assets sold. Interest is charged at a rate based on the buyer’s overnight cost of funds rate for one agreement andor on LIBOR fordepending on the other three agreements. Loansterms of the respective agreement. Mortgage loans and MSRs financed under these agreements may be re-pledged by the lenders.

 

Financial data pertaining to mortgage loansAssets sold under agreements to repurchase are as follows:

summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

 

2014

 

2013

 

2012

 

 

 

(in thousands)

 

Year end:

 

 

 

 

 

 

 

 

 

 

Balance

    

$

822,621 

    

$

471,592 

    

$

393,534 

 

Unused amount (1)

 

$

277,379 

 

$

528,408 

 

$

106,466 

 

Weighted average interest rate (3)

 

 

1.80 

%

 

1.79 

%

 

2.20 

%

Fair value of mortgage loans securing agreements to repurchase

 

$

976,772 

 

$

512,350 

 

$

438,850 

 

Margin deposits placed with counterparties (2)

 

$

1,500 

 

$

1,500 

 

$

6,849 

 

During the year:

 

 

 

 

 

 

 

 

 

 

Average balance of mortgage loans sold under agreements to repurchase

 

$

529,832 

 

$

344,625 

 

$

172,729 

 

Weighted average interest rate (3)

 

 

1.78 

%

 

1.96 

%

 

2.24 

%

Total interest expense

 

$

14,285 

 

$

10,863 

 

$

5,927 

 

Maximum daily amount outstanding

 

$

1,073,073 

 

$

623,523 

 

$

441,245 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

 

 

2016

 

2015

 

2014

 

 

 

 

(dollars in thousands)

 

 

Average balance of assets sold under agreements to repurchase

 

$

1,438,181

 

$

823,490

 

$

529,832

 

 

Weighted average interest rate (1)

 

 

2.91

 

1.78

 

1.78

%

 

Total interest expense

 

$

49,791

 

$

21,377

 

$

14,285

 

 

Maximum daily amount outstanding

 

$

2,661,746

 

$

1,976,744

 

$

1,073,073

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 

 

 

 

2016

    

2015

 

 

 

(dollars in thousands)

 

Carrying value:

 

 

 

 

 

 

 

Unpaid principal balance

 

$

1,736,922

    

$

1,167,405

    

Unamortized debt issuance costs

 

 

(1,808)

 

 

(674)

 

 

 

$

1,735,114

    

$

1,166,731

 

Unused amount (2)

 

$

1,205,078

 

$

40,178

 

Fair value of assets securing repurchase agreements:

 

 

 

 

 

 

 

Mortgage loans held for sale

 

$

1,422,255

 

$

833,748

 

Mortgage servicing rights

 

$

1,479,322

 

$

782,679

 

Servicing advances

 

$

81,306

 

$

68,507

 

Financing receivable from PennyMac Mortgage Investment Trust

 

$

150,000

 

$

 —

 

Weighted average interest rate

 

 

3.02

 

2.50

Margin deposits placed with counterparties (3)

 

$

3,000

 

$

2,500

 


(1)

Excludes the effect of amortization of commitment fees totaling $7.3 million, $7.4 million and $4.7 million for the years ended December 31, 2016, 2015 and 2014, respectively.

(2)

The amount the Company is able to borrow under loanasset repurchase agreements is tied to the fair value of unencumbered mortgage loansassets eligible to secure those agreements and the Company’s ability to fund the agreements’ margin requirements relating to the mortgage loansassets sold.

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Table of Contents

(2)(3)

Margin deposits are included in Other Assetsassets on the Company’s consolidated balance sheet.sheets.

(3)

Excludes the effect of amortization of commitment fees totaling $4.7 million, $4.0 million and $2.0 million for the years ended December 31, 2014, 2013 and 2012, respectively.

 

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Table of Contents

Following is a summary of maturities of outstanding advances under repurchase agreements by maturity date:

 

 

 

 

 

 

Remaining maturity at December 31, 20142016

    

Balance

 

 

 

(dollars in thousands)

 

Within 30 days

 

$

6,846 136,213

 

Over 30 to 90 days

 

 

634,151 1,193,709

 

Over 90 days to 180 days

 

 

1,444 407,000

 

Over 180 days

180,180 

Total loans sold under agreements to repurchase

 

$

822,621 1,736,922

 

Weighted average maturity (in months)

 

 

1.2 4.4

 

 

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 mortgage loans held for sale sold under agreements to repurchase is summarized by counterparty below as of December 31, 2014:

2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average

 

 

 

 

 

 

 

 

maturity of advances  

 

 

 

 

 

 

 

 

under repurchase

 

 

 

Counterparty

 

Amount at risk

 

agreement

 

Facility maturity

 

 

 

(in thousands)

 

                                            

 

                                      

 

Credit Suisse First Boston Mortgage Capital LLC

 

$

89,508 36,579

 

June 12, 2015March 4, 2017

 

OctoberMarch 30, 20152017

Credit Suisse First Boston Mortgage Capital LLC

$

1,072,322

December 19, 2017

December 19, 2017

 

Bank of America, N.A.

 

$

54,534 26,932

 

January 21, 2015March 19, 2017

 

January 30, 2015March 28, 2017

 

Morgan Stanley Bank, N.A.

    

$

10,489 11,741

    

February 18, 20152017

    

June 29, 2015August 25, 2017

JP Morgan Chase Bank, N.A.

$

8,076

March 20, 2017

August 18, 2017

 

Citibank, N.A.

 

$

31 5,338

 

January 22, 201528, 2017

February 2, 2017

Barclays Bank PLC

$

2,351

March 17, 2017

December 1, 2017

Royal Bank of Canada

$

 —

 

September 7, 201518, 2017

 

 

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 mortgage loans securing those agreements decreases.

 

Mortgage Loan Participation and Sale AgreementAgreements

 

OneThree of the borrowing facilities secured by mortgage loans held for sale isare in the form of a mortgage loan participation and sale agreement.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 the lender pending the securitization of the mortgage loans and sale of the resulting securities. A commitment to sell the securities resulting from the pending securitization between the Company and a non-affiliate is also assigned to the lender at the time a participation certificate is sold.

 

The purchase price paid by the lender for each participation certificate is based on the trade price of the security, plus an amount of interest expected to accrue on the security to its anticipated delivery date, minus a present value adjustment, any related hedging costs and a holdback amount that is based on a percentage of the purchase price andprice. 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-51F-53


 

Table of Contents

The mortgage loan participation and sale agreement isagreements are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

 

2016

    

2015

 

2014

 

 

 

(dollars in thousands)

 

Average balance

 

$

268,416

 

$

157,918

 

$

22,756

 

Weighted average interest rate (1)

 

 

1.75

%  

 

1.45

%

 

1.43

%

Total interest expense

 

$

5,523

 

$

2,670

 

$

427

 

Maximum daily amount outstanding

 

$

1,268,871

 

$

250,325

 

$

144,846

 

 

Year ended,

December 31, 2014

(in thousands)

Year end:

Mortgage loan participation and sale agreement secured by mortgage loans

$

 

 

 

 

 

 

 

 

 

 

December 31, 

 

 

 

2016

    

2015

 

 

 

(dollars in thousands)

 

Carrying value:

 

 

 

 

 

 

 

Unpaid principal balance

 

$

671,562

 

$

234,898

 

Unamortized debt issuance costs

 

 

(136)

 

 

(26)

 

 

 

$

671,426

    

$

234,872

 

Weighted average interest rate

 

 

2.02

%  

 

1.45

%

Fair value of mortgage loans pledged to secure mortgage loan participation and sale agreements

 

$

702,919

 

$

245,741

 


143,638 

Mortgage loans pledged to secure mortgage loan participation and sale agreement

$

148,133 

During the year:

Average balance

$

22,756 

Weighted average interest rate (1)

1.43 

%

Total interest expense

$

427 


(1)

Excludes the effect of amortization of commitmentfacility fees totaling $98,000.$740,000 and $355,000 for the years ended December 31, 2016 and 2015, respectively.

 

NoteNotes Payable

 

The Company entered into a revolving credit agreement, dated as of December 30, 2015, pursuant to which the lenders agreed to make revolving loans in an amount not to exceed $100 million. On November 18, 2016, the credit agreement was amended and restated. Pursuant to the amended and restated credit agreement, the lenders have agreed to make revolving loans in an amount not to exceed $150 million. The proceeds of the loans are to be used solely for working capital and general corporate purposes of the Company and its subsidiaries. Interest on the loans shall accrue at a per annum rate of interest equal to, at an election of the Company, 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 rate. The maturity date of the loans is 364 days following the date of the credit agreement.

During December 2015, the Company entered into a note payable is summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

    

2014

    

2013

    

2012

 

 

 

(in thousands)

 

Year end:

 

 

 

 

 

 

 

 

 

 

Note payable secured by:

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

    

$

146,855 

    

$

48,302 

 

$

48,108 

 

Servicing advances

 

 

 —

 

 

3,852 

 

 

4,905 

 

 

 

$

146,855 

 

$

52,154 

 

$

53,013 

 

Assets pledged to secure note payable:

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

$

392,254 

 

$

258,241 

 

$

100,957 

 

Servicing advances

 

$

 —

 

$

5,564 

 

$

7,430 

 

During the year:

 

 

 

 

 

 

 

 

 

 

Average balance

 

$

102,546 

 

$

53,894 

 

$

27,729 

 

Weighted average interest rate

 

 

2.93 

%

 

3.19 

%

 

2.79 

%

Total interest expense

 

$

4,382 

 

$

2,931 

 

$

1,180 

 

The note payablewhich is secured by servicing advances and MSRs relating to certain mortgage loans in the Company’s servicing portfolio, and currently provides for advance rates ranging from 50% to 85% of the amount of the servicing advances or the carrying value of the MSR pledged.portfolio.  Interest is charged at a rate based on LIBOR plus the lender’s overnight costapplicable contract margin.

Notes payable are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

 

 

2016

    

2015

    

2014

 

 

 

 

(dollars in thousands)

 

 

Average balance

 

$

108,475

 

$

214,235

 

$

102,546

 

 

Weighted average interest rate (1)

 

 

5.13

%

 

3.28

%

 

2.93

%

 

Total interest expense

 

$

8,688

 

$

9,336

 

$

4,382

 

 

Maximum daily amount outstanding

 

$

153,849

 

$

469,380

 

$

154,948

 

 


(1)

Excluding the effect of amortization of debt issuance costs totaling  $3.0 million and $2.1 million for the years ended December 31, 2016 and 2015, respectively.

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Table of funds.Contents

 

 

 

 

 

 

 

 

 

 

December 31, 

 

 

 

2016

    

2015

 

 

 

(dollars in thousands)

 

Carrying value:

 

 

 

 

 

 

 

Unpaid principal balance

 

$

151,935

    

$

62,677

 

Unamortized debt issuance costs

 

 

(993)

 

 

(1,541)

 

 

 

$

150,942

 

$

61,136

 

Weighted average interest rate

 

 

4.67

%

 

4.17

%

Unused amount

 

$

98,065

 

$

57,328

 

Assets pledged to secure notes payable:

 

 

 

 

 

 

 

Cash

 

$

91,788

 

$

93,757

 

Carried Interest

 

$

70,906

 

$

69,926

 

Mortgage servicing rights

 

$

138,349

 

$

20,881

 

Obligations Under Capital Lease

In December 2015, the Company entered into a sale-leaseback transaction secured by certain fixed assets and capitalized software. The Company accounts for the sale-leaseback transaction as a capital lease. The capital lease matures on November 3, 2019 and bears interest at a spread over one month LIBOR.

Obligations under capital lease are summarized below:

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

 

 

2016

    

2015

 

 

 

 

(dollars in thousands)

 

 

During the year:

 

 

 

 

 

 

 

 

Average balance

 

$

18,620

 

$

1,132

 

 

Weighted average interest rate

 

 

2.47

%  

 

2.34

%  

 

Total interest expense

 

$

510

 

$

18

 

 

Maximum daily amount outstanding

 

$

24,242

 

$

13,579

 

 

Year end:

 

 

 

 

 

 

 

 

Unpaid principal balance

 

$

23,424

    

$

13,579

 

 

Weighted average interest rate

 

 

2.48

%  

 

2.34

%  

 

Assets pledged to secure obligations under capital lease:

 

 

 

 

 

 

 

 

Furniture, fixtures and equipment

 

$

25,134

 

$

14,034

 

 

Capitalized software

 

$

515

 

$

783

 

 

 

Excess Servicing Spread Financing

 

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 which are treated as financings and are carried at fair value with changes in fair value recognized in current period income.PMT. Under these agreements, the Company sold to PMT the right to receive ESS cash flows relating to certain MSRs. The Company retained all ancillary income associated with servicing the loans and a fixed base servicing fee. The Company continues to be the servicer of the mortgage loans and retains all servicing obligations, including responsibility to make servicing advances. The agreements are treated as financings and are carried at fair value with changes in fair value recognized in current period income.

 

F-52F-55


 

Table of Contents

Following is a summary of ESS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

 

2016

    

2015

    

2014

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of year

 

$

412,425

 

$

191,166

 

$

138,723

 

Issuances of excess servicing spread to PennyMac Mortgage Investment Trust:

 

 

 

 

 

 

 

 

 

 

For cash

 

 

 —

 

 

271,554

 

 

99,728

 

Pursuant to a recapture agreement with PennyMac Mortgage Investment Trust

 

 

6,603

 

 

6,728

 

 

7,342

 

Accrual of interest

 

 

22,601

 

 

25,365

 

 

13,292

 

Repayment

 

 

(69,992)

 

 

(78,578)

 

 

(39,256)

 

Settlement (1)

 

 

(59,045)

 

 

 —

 

 

 —

 

Change in fair value

 

 

(23,923)

 

 

(3,810)

 

 

(28,663)

 

Balance at end of year

 

$

288,669

 

$

412,425

 

$

191,166

 


(1)

On February 29, 2016, the Company and PMT terminated that certain master spread acquisition and MSR servicing agreement that the parties entered into effective February 1, 2013 (the “2/1/13 Spread Acquisition Agreement”) and all amendments thereto. In connection with the termination of the 2/1/13 Spread Acquisition Agreement, the Company reacquired from PMT all of its right, title and interest in and to all of the Fannie Mae ESS previously sold by the Company to PMT under the 2/1/13 Spread Acquisition Agreement and then subject to such 2/1/13 Spread Acquisition Agreement. On February 29, 2016, the Company also reacquired from PMT all of its right, title and interest in and to all of the Freddie Mac ESS previously sold to PMT by the Company.

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

    

2014

    

2013

   

 

 

(in thousands)

 

Balance at beginning of year

 

$

138,723 

 

$

 —

 

Proceeds received from excess servicing spread financing

 

 

99,728 

 

 

139,028 

 

Excess servicing spread issued pursuant to a recapture agreement with PennyMac Mortgage Investment Trust

 

 

7,342 

 

 

 —

 

Accrual of interest expense

 

 

13,292 

 

 

1,348 

 

Repayments

 

 

(39,256)

 

 

(4,076)

 

Change in fair value

 

 

(28,663)

 

 

2,423 

 

Balance at end of year

 

$

191,166 

 

$

138,723 

 

 

 

 

Note 17—16—Liability for Losses Under Representations and Warranties

Following is a summary ofThe activity in the Company’s liability for representations and warranties:

warranties is summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

Year ended December 31,

 

 

2016

    

2015

    

2014

 

    

2014

    

2013

    

2012

 

 

(in thousands)

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of year

 

$

8,123 

 

$

3,504 

 

$

449 

 

 

$

20,611

 

$

13,259

 

$

8,123

 

Provision for losses on loans sold

 

 

5,291 

 

 

4,675 

 

 

3,055 

 

Provision for losses on mortgage loans sold:

 

 

 

 

 

 

 

 

 

 

Resulting from sales of mortgage loans

 

 

7,090

 

 

7,512

 

 

5,291

 

Reduction in liability due to change in estimate

 

 

(7,672)

 

 

 —

 

 

 —

 

Incurred losses

 

 

(155)

 

 

(56)

 

 

 —

 

 

 

(962)

 

 

(160)

 

 

(155)

 

Balance at end of year

 

$

13,259 

 

$

8,123 

 

$

3,504 

 

 

$

19,067

 

$

20,611

 

$

13,259

 

Unpaid principal balance of mortgage loans subject to representations and warranties at year end

 

$

90,650,605

 

$

60,687,246

 

 

 

 

 

 

 

The Company’s representations and warranties are generally not subject to stated limits of exposure. However, management believes that the current unpaid principal balance (“UPB”) of mortgage loans sold by the Company to date represents the maximum exposure to repurchases related to representations and warranties. Management believes the amount and range of reasonably possible losses in relation to the recorded liability is not material to the Company’s financial condition or income.

Note 18—17—Income Taxes

The Company files U.S. federal and state corporate income tax returns for PFSI and partnership returns for PennyMac. Before the IPO, the Company did not have a provision for income taxes as PennyMac is a pass‑through taxable entity. PFSI’sThe Company’s tax returns are subject to examination for 20122013 and forward. PennyMac’s federal partnership

F-56


Table of Contents

returns are subject to examination for 20112013 and forward, and its state tax returns are generally subject to examination for 20102012 and forward. No returns are currently under examination.

 

The following table details the Company’s income tax expense.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

Year ended December 31,

 

    

2014

    

2013

 

    

2016

    

2015

    

2014

 

 

(in thousands)

 

 

(in thousands)

 

Current expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

2,234 

 

$

 —

 

 

$

(1,622)

 

$

 —

 

$

2,234

 

State

 

 

559 

 

 

 —

 

 

 

(244)

 

 

 —

 

 

559

 

Total current expense

 

 

2,793 

 

 

 —

 

 

 

(1,866)

 

 

 —

 

 

2,793

 

Deferred expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

19,126 

 

 

7,815 

 

 

 

38,082

 

 

24,819

 

 

19,126

 

State

 

 

4,803 

 

 

2,146 

 

 

 

9,887

 

 

6,816

 

 

4,803

 

Total deferred expense

 

 

23,929 

 

 

9,961 

 

 

 

47,969

 

 

31,635

 

 

23,929

 

Total provision for income taxes

 

$

26,722 

 

$

9,961 

 

 

$

46,103

 

$

31,635

 

$

26,722

 

 

The provision for deferred income taxes for the years ended December 31, 20142016, 2015 and 20132014 primarily relates to the Company’s investment in PennyMac partially offset by the Company’s generation and utilization of a net operating loss.loss and generation of tax credits. The portion attributable to its investment in PennyMac primarily relates to MSRs that PennyMac received pursuant to sales of mortgage loans held for sale at fair value and Carried Interest from the Investment Funds.

 

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Table of Contents

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

Year ended December 31,

 

    

2014

    

2013

 

    

2016

    

2015

    

2014

 

Federal income tax statutory rate

 

35.0 

%

35.0 

%

 

35.0

%

35.0

%

35.0

%

Less: Rate attributable to noncontrolling interest

 

(25.0)

%

(30.3)

%

 

(24.8)

%

(25.1)

%

(25.0)

%

State income taxes, net of federal benefit

 

1.5 

%

0.8 

%

 

1.6

%

1.6

%

1.5

%

Other

 

0.5 

%

0.0 

%

 

0.2

%

(0.2)

%

0.5

%

Valuation allowance

 

0.0 

%

0.0 

%

 

0.0

%

0.0

%

0.0

%

Effective tax rate

 

12.0 

%

5.5 

%

 

12.0

%

11.3

%

12.0

%

 

The components of the Company’s provision for deferred income taxes are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Year ended December 31,  

 

 

    

2016

    

2015

    

2014

 

 

 

(in thousands)

 

Investment in PennyMac

 

$

40,493

 

$

40,272

 

$

20,981

 

Net operating loss

 

 

8,110

 

 

(8,637)

 

 

2,948

 

Tax credits

 

 

(634)

 

 

 —

 

 

 —

 

Valuation allowance

 

 

 —

 

 

 —

 

 

 —

 

Total provision for deferred income taxes

 

$

47,969

 

$

31,635

 

$

23,929

 

 

 

 

 

 

 

 

 

 

 

 

  Year ended December 31,  

 

 

    

2014

    

2013

 

 

 

(in thousands)

 

Investment in PennyMac

 

$

20,981 

 

$

12,909 

 

Net operating loss carryforward

 

 

2,948 

 

 

(2,948)

 

Valuation allowance

 

 

 —

 

 

 —

 

Total provision for deferred income taxes

 

$

23,929 

 

$

9,961 

 

F-57


 

Table of Contents

The components of Deferred tax asset are as follows:

 

 

 

 

 

 

 

 

 

 

 

December 31, 

 

 

    

2016

    

2015

 

 

 

(in thousands)

 

Taxes currently receivable

 

$

 —

 

$

3,883

 

Deferred income tax asset, net

 

 

 —

 

 

14,495

 

Deferred tax asset

 

$

 —

 

$

18,378

 

The components of Income taxes payable are as follows:

 

 

 

 

 

 

 

 

 

 

 

December 31, 

 

 

    

2014

    

2013

 

 

 

(in thousands)

 

Taxes currently (payable) receivable

 

$

2,014 

 

$

 

Deferred income tax asset, net

 

 

44,024 

 

 

63,110 

 

Deferred tax asset

 

$

46,038 

 

$

63,117 

 

 

 

 

 

 

 

 

 

 

December 31, 

 

    

2016

    

2015

 

 

(in thousands)

Taxes currently receivable

 

$

7,615

 

$

 —

Deferred income tax liability, net

 

 

(32,703)

 

 

 —

Income taxes payable

 

$

(25,088)

 

$

 —

 

The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities are presented below:

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

    

2014

    

2013

 

 

 

(in thousands)

 

Deferred income tax assets:

 

 

 

 

 

 

 

Investment in PennyMac

 

$

44,024 

 

$

60,162 

 

Net operating loss carryforward

 

 

 —

 

 

2,948 

 

Gross deferred tax assets

 

 

44,024 

 

 

63,110 

 

Deferred income tax liabilities:

 

 

 

 

 

 

 

Other

 

 

 —

 

 

 —

 

Gross deferred tax liabilities

 

 

 —

 

 

 —

 

Net deferred income tax asset

 

$

44,024 

 

$

63,110 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

    

2016

    

2015

 

 

 

(in thousands)

 

Deferred income tax assets (liabilities):

 

 

 

 

 

 

 

Investment in PennyMac

 

$

(33,864)

 

$

5,858

 

Net operating loss carryforward

 

 

527

 

 

8,637

 

Tax credits carryforward

 

 

634

 

 

 —

 

Deferred income tax asset (liabilities), net

 

$

(32,703)

 

$

14,495

 

 

The Company’sCompany recorded a net deferred income tax asset is recordedliability in Deferred tax assetIncome taxes payable in the consolidated balance sheet as of December 31, 2014 and 2013.  Increases2016. At December 31, 2015, the Company had a net deferred income tax asset that was recorded in Deferred tax asset. The current year change from a deferred tax asset to a deferred tax liability is attributable to the Company’s ownershipresults of PennyMac as a resultoperations, primarily from the deferral for tax purposes of income from MSRs and Carried Interest from Investment Funds. The increase in Income taxes payable was partially offset by increases in deferred tax assets resulting from PennyMac members exchanging PennyMac Class A units for PFSI Class A common stock result in an increase in deferred tax asset.stock. As existing members exchange their units, the Company records a deferred tax asset related to PennyMac’s election pursuant to Section 754 of the Internal Revenue Code.

The current year’s decrease inCompany recorded a deferred tax asset is attributable to the results of operations partially offset by an increase in the Company’s ownership of PennyMac as a result of members exchanging their units. The portion of the deferred tax asset relating to the Company’s investment in PennyMac is net of deferred tax liabilities primarily$0.5 million related to deferred income from MSRsa net operating loss of approximately $1.3 million which generally expires in 2036, and Carried Interest from the Investment Funds.

F-54


Tabletax credits of Contents$0.6 million, most of which have no expiration and some of which expire in 2036.

 

At December 31, 20142016 and 2013,2015, 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, 20142016 and 2013.

Note 19—Noncontrolling Interest

During the year ended December 31, 2014, PennyMac unitholders exchanged 718,039 Class A units for the Company’s Class A common stock. The effect of the exchanges reduced the percentage of the Noncontrolling interest in Private National Mortgage Acceptance Company, LLC from 72.6% at December 31, 2013 to 71.6% at December 31, 2014.2015.

 

During the year ended December 31, 2013, PennyMac unitholders exchanged 8,035,000 Class A units for the Company’s Class A common stock. The effect

F-58


Table of the exchanges reduced the percentage of the Contents

Note 18—Noncontrolling interest in Private National Mortgage Acceptance Company, LLC from 83.2% at the date of the IPO to 72.6% at December 31, 2013.Interest

 

Net income attributable to the Company’s common stockholders and the effects of changes in noncontrolling ownership interest in PennyMac is summarized below:

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

    

2014

    

2013

 

 

(in thousands)

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

    

$

36,842 

    

$

14,400 

Transfers from (to) the noncontrolling interest:

 

 

 

 

 

 

Decrease in the Company's additional paid-in capital for initial recognition of noncontrolling interest (12,778 Class A units)

 

$

 —

 

$

(127,160)

Increase in the Company's additional paid-in capital for exchanges of Class A units of Private National Mortgage Acceptance Company, LLC to Class A stock of PennyMac Financial Services, Inc. (Class A shares issued, 718 and 8,035 during the years ended December 31, 2014 and 2013, respectively)

 

 

7,107 

 

 

60,556 

Net transfers from (to) noncontrolling interest

 

$

7,107 

 

$

(66,604)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

 

 

2016

    

2015

 

2014

 

 

 

 

(in thousands)

 

 

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

 

$

66,079

    

$

47,228

 

$

36,842

 

 

Increase in the Company's additional paid-in capital for exchanges of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.

 

$

6,877

 

$

4,982

 

$

7,107

 

 

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

 

 

301

 

 

319

 

 

718

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

2016

    

2015

Percentage of noncontrolling interest in Private National Mortgage Acceptance Company, LLC

 

 

70.6

%

 

71.1

%

 

 

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Table of Contents

Note 20—19—Net Gains on Mortgage Loans Held for Sale

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

    

2014

    

2013

    

2012

 

 

 

(in thousands)

 

Cash (loss) gain:

 

 

 

 

 

 

 

 

 

 

Sales proceeds

    

$

43,665 

    

$

(150,589)

    

$

78,671 

 

Hedging activities

 

 

(90,507)

 

 

98,707 

 

 

(70,916)

 

 

 

 

(46,842)

 

 

(51,882)

 

 

7,755 

 

Non-cash gain:

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights resulting from mortgage loan sales

 

 

209,850 

 

 

205,105 

 

 

90,472 

 

Mortgage servicing liabilities resulting from mortgage loan sales

 

 

(1,965)

 

 

 —

 

 

 —

 

Mortgage servicing rights and excess servicing spread financing recapture payable to PennyMac Mortgage Investment Trust

 

 

(7,837)

 

 

(709)

 

 

 —

 

Provision for losses relating to representations and warranties on loans sold

 

 

(5,291)

 

 

(4,675)

 

 

(3,055)

 

Change in fair value relating to loans and hedging derivatives held at period end:

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

25,640 

 

 

(17,179)

 

 

16,035 

 

Mortgage loans

 

 

12,733 

 

 

(4,207)

 

 

4,030 

 

Hedging derivatives

 

 

(19,264)

 

 

11,560 

 

 

2,933 

 

 

 

$

167,024 

 

$

138,013 

 

$

118,170 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

 

2016

    

2015

    

2014

 

 

 

(in thousands)

 

From non-affiliates:

 

 

 

 

 

 

 

 

 

 

Cash loss:

 

 

 

 

 

 

 

 

 

 

Mortgage loans

 

$

(62,283)

    

$

(82,709)

    

$

43,665

 

Hedging activities

 

 

10,275

 

 

(47,150)

 

 

(90,507)

 

 

 

 

(52,008)

 

 

(129,859)

 

 

(46,842)

 

Non-cash gain:

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights and mortgage servicing liabilities resulting from mortgage loan sales, net

 

 

562,540

 

 

452,411

 

 

207,885

 

Provision for losses relating to representations and warranties:

 

 

 

 

 

 

 

 

 

 

Pursuant to mortgage loan sales

 

 

(7,090)

 

 

(7,512)

 

 

(5,291)

 

Reduction in liability due to change in estimate

 

 

7,672

 

 

 —

 

 

 —

 

Change in fair value relating to mortgage loans and hedging derivatives held at year end:

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

15,618

 

 

11,372

 

 

25,640

 

Mortgage loans

 

 

2,796

 

 

3,949

 

 

12,733

 

Hedging derivatives

 

 

10,344

 

 

(1,810)

 

 

(19,264)

 

 

 

 

539,872

 

 

328,551

 

 

174,861

 

Recapture payable to PennyMac Mortgage Investment Trust

 

 

(8,092)

 

 

(7,836)

 

 

(7,837)

 

 

 

$

531,780

 

$

320,715

 

$

167,024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents

Note 21—20—Net Interest Expense

Net interest expense is summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

Year ended December 31, 

 

    

2014

    

2013

    

2012

 

 

2016

    

2015

    

2014

 

 

(in thousands)

 

 

(in thousands)

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates:

 

 

 

 

 

 

 

 

Short-term investments

 

$

1,591 

 

$

893 

 

$

72 

 

 

$

2,558

 

$

506

 

$

734

 

Mortgage loans held for sale at fair value

 

 

26,180 

 

 

14,739 

 

 

6,282 

 

 

 

54,584

 

42,008

 

26,180

 

Placement fees relating to custodial funds

 

 

16,155

 

 

3,298

 

 

857

 

 

 

73,297

 

45,812

 

 

27,771

 

From PennyMac Mortgage Investment Trust—Financing receivable

 

 

7,830

 

 

3,343

 

 

 —

 

 

 

81,127

 

 

49,155

 

 

27,771

 

 

 

27,771 

 

 

15,632 

 

 

6,354 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans sold under agreements to repurchase

 

 

14,285 

 

 

10,863 

 

 

5,927 

 

Mortgage loan participation and sale agreement

 

 

427 

 

 

 —

 

 

 —

 

Note payable

 

 

4,382 

 

 

2,931 

 

 

1,180 

 

Excess servicing spread financing at fair value

 

 

13,292 

 

 

1,091 

 

 

 —

 

To non-affiliates:

 

 

 

 

 

 

 

 

Assets sold under agreements to repurchase

 

 

49,791

 

21,377

 

14,285

 

Mortgage loan participation and sale agreements

 

 

5,523

 

2,670

 

427

 

Notes payable

 

 

8,688

 

9,336

 

4,382

 

Obligations under capital lease

 

 

510

 

18

 

2

 

Interest shortfall on repayments of mortgage loans serviced for Agency securitizations

 

 

2,460 

 

 

469 

 

 

293 

 

 

 

15,102

 

6,883

 

2,460

 

Interest on mortgage loan impound deposits

 

 

2,409 

 

 

1,317 

 

 

477 

 

 

 

3,991

 

 

2,888

 

 

2,409

 

Other

 

 

 

 

 

 

 

 

 

83,605

 

43,172

 

23,965

 

To PennyMac Mortgage Investment Trust—Excess servicing spread financing at fair value

 

 

22,601

 

 

25,365

 

 

13,292

 

 

 

37,257 

 

 

16,673 

 

 

7,879 

 

 

 

106,206

 

 

68,537

 

 

37,257

 

 

$

(9,486)

 

$

(1,041)

 

$

(1,525)

 

 

$

(25,079)

 

$

(19,382)

 

$

(9,486)

 

 

 

 

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Table of Contents

Note 22—21—Stock‑based Compensation

The Company’s 2013 Equity Incentive Plan provides for grants of stock options, time-based and performance-based restricted stock units (“RSUs”), stock appreciation rights, performance units and stock grants. As of December 31, 2014,2016, the Company has 2.62.0 million units available for future awards. The Company estimates the cost of the stock options, time-based restricted stock units and performance-based restricted stock units awarded with reference to the fair value of PFSI’s common stock on the date of the award. Compensation costs are fixed, except for the performance-based restricted stock units, at the grant’s estimated fair value on the grant date as all grantees are employees of PennyMac or directors of the Company. Expense relating to awards is included in Compensation in the consolidated statements of income.

 

Following is a summary of the stock-based compensation expense by instrument awarded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

 

2016

    

2015

    

2014

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Performance-based RSUs

 

$

9,475

 

$

9,293

 

$

3,075

 

Stock options

 

 

4,464

 

 

5,713

 

 

5,101

 

Time-based RSUs

 

 

2,494

 

 

2,294

 

 

1,824

 

Exchangeable PNMAC units

 

 

72

 

 

221

 

 

331

 

 

 

$

16,505

 

$

17,521

 

$

10,331

 

Performance‑Based RSUs

The performance‑based RSUs provide for the issuance of shares of the Company’s Class A common stock based on the attainment of earnings per share and/or total shareholder return goals and are generally adjusted for grantee job performance ratings. The grantees’ satisfaction of the performance goals will be established by review of a

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committee of the Company’s board of directors. Approximately 414,000 shares vested under the grants with a performance period ended December 31, 2016 will be issued to the grantees in April 2017. No shares were issued relating to the RSUs with a performance period ended December 31, 2015 as the established performance goals were not achieved.

The performance‑based RSUs contain performance goals (attainment of earnings per share) and the grants awarded during the year ended December 31, 2014 included a market goal (total shareholder return). The actual amount of shares earned could vary from zero, if the performance goals are not met, to as much as 150% of target, if the performance goals are meaningfully exceeded. The Company separately accounts for the performance and market goals when recognizing compensation expense relating to performance‑based RSUs.

The grant date fair value of the market goal component of the performance‑based RSUs is measured using a variant of the Black‑Scholes model.

Following are the key inputs for grants made:

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

    

2014

    

2013

 

 

 

(in thousands)

 

Stock options

 

$

5,101 

 

$

1,387 

 

Performance-based RSUs

 

 

3,075 

 

 

1,273 

 

Time-based RSUs

 

 

1,824 

 

 

672 

 

 

 

$

10,000 

 

$

3,332 

 

Year ended 

December 31, 2014

Expected volatility (1)

42%

Expected dividends

0%

Risk-free rate

0.1% - 0.7%

Expected grantee forfeiture rate

4.3% - 20.2%


(1)

Based on historical volatilities of comparable companies’ common stock.

The fair value of the performance goal component 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.

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Table of Contents

Following is a summary of performance‑based RSU activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

 

2016

 

2015

 

2014

 

 

 

(in thousands, except per unit amounts)

 

Number of units:

    

 

 

    

 

 

    

 

 

 

Outstanding at beginning of year

 

 

2,350

 

 

1,257

 

 

491

 

Granted

 

 

813

 

 

1,143

 

 

789

 

Vested

 

 

 —

 

 

 —

 

 

 —

 

Forfeited or cancelled

 

 

(688)

 

 

(50)

 

 

(23)

 

Outstanding at end of year

 

 

2,475

 

 

2,350

    

 

1,257

 

Weighted average grant date fair value per unit:

 

 

 

 

 

 

 

 

 

 

Outstanding at beginning of year

 

$

16.30

 

$

15.48

 

$

11.30

 

Granted

 

$

11.28

 

$

17.21

 

$

14.35

 

Vested

 

 

 —

 

 

 —

 

 

 —

 

Forfeited

 

$

16.87

 

$

16.46

 

$

15.94

 

Outstanding at end of year

 

$

14.24

 

$

16.30

 

$

15.48

 

Compensation expense recorded during the year

 

$

9,475

 

$

9,293

 

$

3,075

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

2016

    

2015

 

 

( in thousands, except for vesting periods)

Unamortized compensation cost

 

$

10,048

 

$

16,620

Number of shares expected to vest

 

 

2,109

 

 

2,141

Weighted average remaining vesting period (in months)

 

 

12

 

 

17

 

Stock Options

 

The stock option award agreements provide for the award of Stock Optionsstock 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. Compensation cost relating to stock options is charged to expense using the graded vesting method. 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.

 

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 assumptions noted in the following table:

inputs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

Year ended December 31,

 

    

2014

    

2013

 

    

2016

    

2015

    

2014

 

Expected volatility (1)

 

42%

 

45%

 

 

28%

 

41%

 

42%

 

Expected dividends

 

0%

 

0%

 

 

0%

 

0%

 

0%

 

Risk-free rate

 

0.1% - 2.9%

 

0.3% - 2.3%

 

Risk-free interest rate

 

0.3% - 2.1%

 

0.1% - 2.3%

 

0.1% - 2.9%

 

Expected grantee forfeiture rate

 

4.3% - 20.2%

 

6.2% - 19.2%

 

 

0.0% -20.2%

 

0.0% -18.7%

 

4.3% - 20.2%

 


(1)

Based on historical volatilities of the Company’s common stock for 2016 grants and based on historical volatilities of comparable companies’ common stock.stock for 2015 and 2014 grants.

 

The Company uses its historical dataemployee departure behavior to estimate employee departure behaviorgrantee forfeiture rates used in the option‑pricing model; groups of employees (employee classification) that have similar historical behavior are considered separately for valuation purposes.model.  The expected term of common stock options granted is derived from the option pricing model and represents the period of time that common stock options granted are expected to be outstanding. The risk‑free interest

F-62


Table of Contents

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.

 

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Table of Contents

The table below summarizes stock option award activity and compensation expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

    

2016

 

2015

 

2014

 

 

(in thousands, except per option amounts)

Number of Stock Options:

 

 

 

 

 

 

    

 

 

Outstanding at beginning of year

 

 

1,845

 

 

1,167

 

 

419

Granted

 

 

962

 

 

715

 

 

769

Exercised

 

 

(9)

 

 

 —

 

 

 —

Forfeited

 

 

(60)

 

 

(37)

 

 

(21)

Outstanding at end of year

 

 

2,738

 

 

1,845

 

 

1,167

Weighted average exercise price per option:

 

 

 

 

 

 

 

 

 

Outstanding at beginning of year

 

$

18.17

 

$

18.23

 

$

21.03

Granted

 

$

11.29

 

$

17.52

 

$

17.22

Exercised

 

$

17.33

 

$

17.26

 

$

 —

Forfeited

 

$

15.66

 

$

17.88

 

$

18.71

Outstanding at end of year

 

$

15.81

 

$

18.17

 

$

18.23

Compensation expense recorded during the year

 

$

4,464

 

$

5,713

 

$

5,101

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

    

2014

 

2013

 

Number of Stock Options

 

 

 

    

 

 

 

Outstanding at beginning of year

 

 

418,785 

 

 

 —

 

Granted

 

 

769,035 

 

 

425,796 

 

Exercised

 

 

 —

 

 

 —

 

Forfeited

 

 

(20,639)

 

 

(7,011)

 

Outstanding at end of year

 

 

1,167,181 

 

 

418,785 

 

Number of options exercisable at end of year

 

 

137,816 

 

 

 —

 

Weighted average exercise price per share:

 

 

 

 

 

 

 

Outstanding at beginning of year

 

$

21.03 

 

$

 —

 

Granted

 

 

17.22 

 

 

21.03 

 

Exercised

 

 

 —

 

 

 —

 

Forfeited

 

 

18.71 

 

 

21.03 

 

Outstanding at end of year

 

$

18.23 

 

$

21.03 

 

Weighted average remaining contractual term (in years):

 

 

 

 

 

 

 

Outstanding at end of year

 

 

8.9 

 

 

9.4 

 

Exercisable at end of year

 

 

8.4 

 

 

 —

 

Aggregate intrinsic value:

 

 

 

 

 

 

 

Outstanding at end of year

 

$

59,270 

 

$

 —

 

Exercisable at end of year

 

$

 —

 

$

 —

 

Expected vesting amounts at year end:

 

 

 

 

 

 

 

Number of options expected to vest at end of year

 

 

1,032,309 

 

 

340,061 

 

Weighted average vesting period (in months)

 

 

24 

 

 

21 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

2016

    

2015

 

 

(in thousands, except for time periods)

Number of options exercisable at end of year

 

 

1,104

 

 

533

Weighted average remaining contractual term (in years):

 

 

 

 

 

 

Outstanding

 

 

8.0

 

 

8.6

Exercisable

 

 

7.1

 

 

8.0

Aggregate intrinsic value:

 

 

 

 

 

 

Outstanding

 

$

5,042

 

$

 —

Exercisable

 

$

13

 

$

 —

Expected vesting amounts at year end:

 

 

 

 

 

 

Number of options expected to vest

 

 

1,504

 

 

1,280

Weighted average vesting period (in months)

 

 

11

 

 

17

 

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 Class A 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 Class A common stock and the number of shares expected to vest. For purposes of estimating the cost of the time‑based RSUs granted, managementthe Company assumes turnoverforfeiture rates of 4.3% ‑ 20.2% per year based on the grantees’ employee classification. Compensation cost relating to time‑based RSUs is amortized to expense using the graded vesting method and is included in Compensation expense on the accompanying consolidated statements of income.

F-58F-63


 

Table of Contents

Following is a summary of time‑based RSU activity:

 

 

 

 

 

 

 

 

 

 

 

 

    

Year ended December 31,

 

 

2016

 

2015

 

2014

 

 

(in thousands, except per unit amounts)

Number of units:

    

 

 

    

 

 

    

 

 

Outstanding at beginning of year

 

 

271

 

 

202

 

 

100

Granted

 

 

261

 

 

150

 

 

147

Vested

 

 

(127)

 

 

(75)

 

 

(33)

Forfeited

 

 

(23)

 

 

(6)

 

 

(12)

Outstanding at end of year

 

 

382

 

 

271

 

 

202

Weighted average grant date fair value per unit:

 

 

 

 

 

 

 

 

 

Outstanding at beginning of year

 

$

17.81

 

$

17.92

 

$

18.04

Granted

 

$

11.77

 

$

17.87

 

$

16.73

Vested

 

$

17.99

 

$

18.25

 

$

20.46

Forfeited

 

$

15.55

 

$

26.07

 

$

10.72

Outstanding at end of year

 

$

13.71

 

$

17.81

 

$

17.92

Compensation expense recorded during the year

 

$

2,494

 

$

2,294

 

$

1,824

 

 

 

 

 

 

 

 

 

 

    

Year ended December 31,

 

 

 

2014

    

2013

 

Number of units

     

 

 

     

 

 

 

Outstanding at beginning of year

 

 

100,318 

 

 

 —

 

Granted

 

 

146,937 

 

 

101,459 

 

Vested

 

 

(32,619)

 

 

 —

 

Forfeited

 

 

(12,265)

 

 

(1,141)

 

Outstanding at end of year

 

 

202,371 

 

 

100,318 

 

Weighted average grant date fair value per unit:

 

 

 

 

 

 

 

Outstanding at beginning of year

 

$

18.04 

 

$

 —

 

Granted

 

 

16.73 

 

 

18.03 

 

Vested

 

 

20.46 

 

 

 —

 

Forfeited

 

 

10.72 

 

 

17.14 

 

Outstanding at end of year

 

$

17.92 

 

$

18.04 

 

Compensation expense recorded during the year (in thousands)

 

$

1,824 

 

$

672 

 

Year end:

 

 

 

 

 

 

 

Unamortized compensation cost (in thousands)

 

$

1,441 

 

$

1,099 

 

Number of shares expected to vest

 

 

183,521 

 

 

58,398 

 

Weighted average remaining vesting period (in months)

 

 

24 

 

 

18 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

2016

    

2015

 

 

( in thousands, except for vesting periods)

Unamortized compensation cost

 

$

1,742

 

$

2,270

Number of shares expected to vest

 

 

339

 

 

232

Weighted average remaining vesting period (in months)

 

 

12

 

 

20

 

Performance‑Based RSUs

The performance‑based RSUs provide for the issuance of shares of the Company’s Class A common stock based equally on the attainment of earnings per share and total shareholder return goals and are generally adjusted for grantee performance ratings. The performance periods for these grants are measured through December 31, 2015 and 2016. The grantees’ satisfaction of the performance goals will be established by review of a committee of PFSI’s board of directors. Shares vested under these two grants will be issued to the grantees no later than December 31,2015 and 2016, respectively.

The performance‑based RSUs contain both performance goals (attainment of earnings per share) and market goals (total shareholder return). The Company separately accounts for the performance and market goals when recognizing compensation expense relating to performance‑based RSUs.

The grant date fair value of the market goal component of the performance‑based RSUs is measured using a variant of the Black‑Scholes model. Key inputs are the expected volatility of the Company’s Class A common stock, the risk‑free interest rate and expected grantee forfeiture rates.

Following are the inputs for grants made:

 

 

 

 

 

 

 

Year ended December 31,

 

    

2014

    

2013

Expected volatility (1)

 

42%

 

45%

Expected dividends

 

0%

 

0%

Risk-free rate

 

0.1% - 0.7%

 

0.3% - 2.3%

Expected grantee forfeiture rate

 

4.3% - 20.2%

 

6.2% - 19.2%

 

 

 

 

 


(1)

Based on historical volatilities of comparable companies’ common stock.

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Table of Contents

The fair value of the performance goal component of the performance‑based RSUs is measured based on the fair value of the Company’s common shares at the grant date, taking into consideration management’s estimate of the most probable outcome of the performance goal, and the number of shares to be forfeited during the vesting period. The cost of the performance‑based RSUs is amortized to Compensation expense using the straight line method over the performance period.

Following is a summary of performance‑based RSU activity:

 

 

 

 

Note 22—Supplemental Cash Flow Information

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

 

2014

 

2013

 

Number of units

    

 

 

 

 

 

 

Outstanding at beginning of year

 

 

490,998 

 

 

 —

 

Granted

 

 

789,312 

 

 

500,373 

 

Vested

 

 

 —

 

 

 —

 

Forfeited

 

 

(22,844)

 

 

(9,375)

 

Outstanding at end of year

 

 

1,257,466 

    

 

490,998 

 

Weighted average grant date fair value per unit:

 

 

 

 

 

 

 

Outstanding at beginning of year

 

$

11.30 

 

$

 —

 

Granted

 

 

14.35 

 

 

11.29 

 

Vested

 

 

 —

 

 

 —

 

Forfeited

 

 

15.94 

 

 

10.85 

 

Outstanding at end of year

 

$

15.48 

 

$

11.30 

 

Compensation expense recorded during the year (in thousands)

 

$

3,075 

 

$

1,273 

 

Year end:

 

 

 

 

 

 

 

Unamortized compensation cost (in thousands)

 

$

8,019 

 

$

4,364 

 

Number of shares expected to vest

 

 

866,181 

 

 

448,639 

 

Weighted average remaining vesting period (in months)

 

 

24 

 

 

18 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 

 

 

2016

   

2015

   

2014

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

104,938

   

$

69,317

   

$

36,320

Cash paid for income taxes

 

$

1,866

 

$

1,909

 

$

4,800

Non-cash investing activity:

 

 

 

 

 

 

 

 

 

Mortgage servicing rights resulting from mortgage loan sales

 

$

577,531

 

$

472,853

 

$

209,850

Mortgage servicing liabilities resulting from mortgage loan sales

 

$

14,991

 

$

20,442

 

$

1,965

Transfer of Note receivable from PennyMac Mortgage Investment Trust to Asset sold under agreement to repurchase from PennyMac Mortgage Investment Trust

 

$

150,000

 

$

 —

 

$

 —

Non-cash financing activity:

 

 

 

 

 

 

 

 

 

Transfer of excess servicing spread to PennyMac Mortgage Investment Trust pursuant to a recapture agreement

 

$

6,603

 

$

6,728

 

$

7,342

Unpaid distribution to Private National Mortgage Acceptance Company, LLC members

 

$

7,585

 

$

 —

 

$

 —

Issuance of common stock in settlement of director fees

 

$

313

 

$

297

 

$

222

 

 

 

Note 23—Supplemental Cash Flow InformationRegulatory Capital and Liquidity Requirements

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

   

2014

   

2013

   

2012

 

 

 

(in thousands)

Cash paid for interest

   

$

36,320 

   

$

16,527 

   

$

7,858 

Cash paid for income taxes

 

$

4,800 

 

$

 

$

 —

Non-cash investing activity:

 

 

 

 

 

 

 

 

 

Mortgage servicing rights resulting from mortgage loan sales

 

$

209,850 

 

$

205,105 

 

$

90,472 

Mortgage servicing liabilities resulting from mortgage loan sales

 

$

1,965 

 

$

 —

 

$

 —

Non-cash financing activity:

 

 

 

 

 

 

 

 

 

Transfer of excess servicing spread pursuant to recapture agreement with PennyMac Mortgage Investment Trust

 

$

7,342 

 

$

 —

 

$

 —

Issuance of common stock in settlement of director fees

 

$

222 

 

$

 —

 

$

 —

Note 24—Regulatory Net Worth and Agency Capital Requirements

The Company, through PLS and PennyMac, is required to maintain specified levels of equity to remain a seller/servicer in good standing with the Agencies. Such equity 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

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million plus 25 basis points (0.25%) of the Company’s total 1-4 unit servicing portfolio, excluding mortgage loans subserviced for others and a liquidity requirement equal to 3.5 basis points of the aggregate UPB serviced for the Agencies plus 200 basis points of total nonperforming Agency UPB in excess of 6.0%.

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 Capital

 

 

 

December 31, 2014

 

December 31, 2013

 

Agency–company subject to requirement

    

Balance (1)

    

Requirement

    

Balance (1)

    

Requirement

 

 

 

(in thousands)

 

Fannie Mae–PLS

 

$

583,686 

 

$

35,507 

 

$

409,552 

 

$

83,148 

 

Freddie Mac–PLS

 

$

583,819 

 

$

3,721 

 

$

409,860 

 

$

3,001 

 

Ginnie Mae–PLS

 

$

536,009 

 

$

111,457 

 

$

388,125 

 

$

102,619 

 

Ginnie Mae–PennyMac

 

$

763,907 

 

$

133,748 

 

$

598,198 

 

$

112,881 

 

HUD–PLS

 

$

539,844 

 

$

2,500 

 

$

388,125 

 

$

2,500 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

December 31, 2015

 

Agency–company subject to requirement

    

Balance (1)

    

Requirement

    

Balance (1)

    

Requirement

 

 

 

(in thousands)

 

Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae & Freddie Mac - PLS

 

$

1,289,464

 

$

335,883

 

$

835,157

 

$

283,655

 

Ginnie Mae - PLS

 

$

1,085,549

 

$

455,542

 

$

633,222

 

$

386,732

 

Ginnie Mae - PennyMac

 

$

1,261,565

 

$

501,097

 

$

894,731

 

$

425,405

 

HUD - PLS

 

$

1,085,549

 

$

2,500

 

$

633,222

 

$

2,500

 

Liquidity

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae & Freddie Mac - PLS

 

$

179,230

 

$

45,930

 

$

145,431

 

$

38,936

 

Ginnie Mae - PLS

 

$

179,230

 

$

115,304

 

$

145,431

 

$

95,868

 


(1)

Calculated in compliance with the respective Agency’s requirements.

 

Noncompliance with the respective Agencies’ capitalan Agency’s requirements can result in the respectivesuch Agency taking various remedial actions up to and including removingterminating PennyMac’s ability to sell loans to and service loans on behalf of the respective Agency. Management believes that PennyMac and PLS had Agency capital in excess of the respective Agencies’ requirements at December 31, 2014.

Note 25—24—Commitments and Contingencies

Litigation

 

The business of the Company involves the collection of numerous accounts, as well as the validation of liens and compliance with various state and federal lending and servicing laws. Accordingly, the Company may be involved in proceedings, claims, and legal actions arising in the ordinary course of business. As of December 31, 2014,2016, the Company was not involved in any legal proceedings, claims, or actions that in management’s view would be reasonably likely to have a material adverse effect on the Company.

 

Commitments to FundPurchase and SellFund Mortgage Loans

 

 

 

 

 

 

 

 

December 31, 20142016

 

 

    

(in thousands)

 

Commitments to purchase mortgage loans from PennyMac Mortgage Investment Trust

 

$

1,122,494 2,508,788

 

Commitments to fund mortgage loans

 

 

643,103 1,770,823

 

 

 

$

1,765,597 

Commitments to sell mortgage loans

$

3,901,851 

Office leases

$

17,776 4,279,611

 

 

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Leases

The Company leases office facilities. Rent expense during the years ended December 31, 2016, 2015 and 2014 was $9.1 million, $4.6 million and $4.2 million, respectively.

The following table provides a summary of future minimum lease payments required under lease agreements, which may also contain renewal options as of December 31, 2016:

 

 

 

 

 

 

Future minimum lease payments

 

 

(in thousands)

2017

 

$

9,516

2018

 

 

12,702

2019

 

 

13,227

2020

 

 

12,885

2021

 

 

11,304

Thereafter

 

 

41,152

 

 

$

100,786

 

 

Note 26—25—Segments and Related Information

Since the date of the Company’s IPO, the Company has continued its development of internal management reporting. Such development has resulted in changes in the information that is provided to the Company’s chief operating decision maker. Accordingly, during the quarter ended March 31, 2014, management re-evaluated this new information in relation to its definition of its operating segments.

 

As a result of the new reporting provided to the chief operating decision maker, management has concluded that its mortgage banking operations should be disclosed as two segments: loan production and loan servicing. Accordingly, the following segment disclosure includesThe Company operates in three segments: loan production, loan servicing and investment management. Prior period segment disclosures have been restated to conform segment disclosures for the year ended December 31,

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2013. The Company did not have in place the reporting structure that enabled it to report on its three segments before 2013 and is therefore unable to retrospectively adjust its 2012 segment information to conform with the 2014 and 2013 presentation.

 

Two of the segments are in the mortgage banking business: loan production and loan servicing. The loan production segment performs mortgage loan origination, acquisition and sale activities. The loan servicing segment performs servicing of newly originated mortgage loans, execution and management of early buyout loanstransactions and servicing of mortgage loans sourced and managed by the investment management segment for the Advised Entities, including executing the loan resolution strategy identified by the investment management segment relating to distressed mortgage loans.

 

The investment management segment represents the activities of the Company’s investment manager, which include sourcing, performing diligence, bidding and closing investment asset acquisitions, managing correspondent production activities for PMT and managing the acquired assets for the Advised Entities.

 

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Financial highlightsperformance and results by segment are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2014

 

 

Year ended December 31, 2016

 

 

Mortgage Banking

 

Investment

 

 

 

 

 

Mortgage Banking

 

Investment

 

 

 

 

    

Production

    

Servicing

    

Total

    

Management

    

Total

 

    

Production

    

Servicing

    

Total

    

Management

    

Total

 

 

(in thousands)

 

 

(in thousands)

 

Revenues (1)

 

 

 

 

 

 

 

 

 

 

 

                    

 

 

 

 

Net gains on mortgage loans held for sale at fair value

 

$

158,758 

 

$

8,266 

 

$

167,024 

 

$

 —

 

$

167,024 

 

Revenue: (1)

 

 

 

 

 

 

 

 

 

 

 

                    

 

 

 

 

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

 

$

464,027

 

$

67,753

 

$

531,780

 

$

 —

 

$

531,780

 

Loan origination fees

 

 

41,576 

 

 

 —

 

 

41,576 

 

 

 —

 

 

41,576 

 

 

 

125,534

 

 

 —

 

 

125,534

 

 

 —

 

 

125,534

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

48,719 

 

 

 —

 

 

48,719 

 

 

 —

 

 

48,719 

 

 

 

86,465

 

 

 —

 

 

86,465

 

 

 —

 

 

86,465

 

Net servicing fees

 

 

 —

 

 

216,919 

 

 

216,919 

 

 

 —

 

 

216,919 

 

 

 

 —

 

 

185,466

 

 

185,466

 

 

 —

 

 

185,466

 

Management fees

 

 

 —

 

 

 —

 

 

 —

 

 

42,508 

 

 

42,508 

 

 

 

 —

 

 

 —

 

 

 —

 

 

22,746

 

 

22,746

 

Carried Interest from Investment Funds

 

 

 —

 

 

 —

 

 

 —

 

 

6,156 

 

 

6,156 

 

 

 

 —

 

 

 —

 

 

 —

 

 

980

 

 

980

 

Net interest income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 —

 

 

 —

 

 

 

 

 

 —

 

 

 

 

Interest income

 

 

21,873 

 

 

5,893 

 

 

27,766 

 

 

 

 

27,771 

 

 

 

48,944

 

 

32,182

 

 

81,126

 

 

1

 

 

81,127

 

Interest expense

 

 

12,143 

 

 

25,114 

 

 

37,257 

 

 

 —

 

 

37,257 

 

 

 

32,669

 

 

73,537

 

 

106,206

 

 

50

 

 

106,256

 

 

 

9,730 

 

 

(19,221)

 

 

(9,491)

 

 

 

 

(9,486)

 

 

 

16,275

 

 

(41,355)

 

 

(25,080)

 

 

(49)

 

 

(25,129)

 

Other

 

 

1,890 

 

 

1,275 

 

 

3,165 

 

 

318 

 

 

3,483 

 

 

 

2,104

 

 

1,022

 

 

3,126

 

 

319

 

 

3,445

 

Total net revenue

 

 

260,673 

 

 

207,239 

 

 

467,912 

 

 

48,987 

 

 

516,899 

 

 

 

694,405

 

 

212,886

 

 

907,291

 

 

23,996

 

 

931,287

 

Expenses

 

 

125,054 

 

 

141,314 

 

 

266,368 

 

 

28,876 

 

 

295,244 

 

 

 

278,309

 

 

248,985

 

 

527,294

 

 

21,510

 

 

548,804

 

Income before provision for income taxes and non-segment activities

 

 

135,619 

 

 

65,925 

 

 

201,544 

 

 

20,111 

 

 

221,655 

 

 

 

416,096

 

 

(36,099)

 

 

379,997

 

 

2,486

 

 

382,483

 

Non-segment activities (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,378 

 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

600

 

Income before provision for income taxes

 

$

135,619 

 

$

65,925 

 

$

201,544 

 

$

20,111 

 

$

223,033 

 

 

$

416,096

 

$

(36,099)

 

$

379,997

 

$

2,486

 

$

383,083

 

Segment assets at year end (3)

 

$

1,040,358 

 

$

1,320,092 

 

$

2,360,450 

 

$

92,881 

 

$

2,453,331 

 

 

$

2,195,330

 

$

2,841,551

 

$

5,036,881

 

$

91,517

 

$

5,128,398

 


(1)

All revenues are from external customers.

(2)

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

(3)

Excludes parent Company assets, which consist primarily of working capital of $5.5 million.

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2015

 

 

 

Mortgage Banking

 

Investment

 

 

 

 

 

    

Production

    

Servicing

    

Total

    

Management

    

 Total

  

 

 

(in thousands)

 

Revenue: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains on mortgage loans held for sale at fair value

 

$

310,254

 

$

10,461

 

$

320,715

 

$

 —

 

$

320,715

 

Loan origination fees

 

 

91,520

 

 

 —

 

 

91,520

 

 

 —

 

 

91,520

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

58,607

 

 

 —

 

 

58,607

 

 

 —

 

 

58,607

 

Net servicing fees

 

 

 —

 

 

229,543

 

 

229,543

 

 

 —

 

 

229,543

 

Management fees

 

 

 —

 

 

 —

 

 

 —

 

 

28,237

 

 

28,237

 

Carried Interest from Investment Funds

 

 

 —

 

 

 —

 

 

 —

 

 

2,628

 

 

2,628

 

Net interest income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

39,238

 

 

9,917

 

 

49,155

 

 

 —

 

 

49,155

 

Interest expense

 

 

19,851

 

 

48,686

 

 

68,537

 

 

 —

 

 

68,537

 

 

 

 

19,387

 

 

(38,769)

 

 

(19,382)

 

 

 —

 

 

(19,382)

 

Other

 

 

1,868

 

 

1,087

 

 

2,955

 

 

(18)

 

 

2,937

 

Total net revenue

 

 

481,636

 

 

202,322

 

 

683,958

 

 

30,847

 

 

714,805

 

Expenses

 

 

209,767

 

 

201,025

 

 

410,792

 

 

23,125

 

 

433,917

 

Income before provision for income taxes and non-segment activities

 

 

271,869

 

 

1,297

 

 

273,166

 

 

7,722

 

 

280,888

 

Non-segment activities (2)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,695)

 

Income before provision for income taxes

 

$

271,869

 

$

1,297

 

$

273,166

 

$

7,722

 

$

279,193

 

Segment assets at year end (3)

 

$

1,122,242

 

$

2,270,940

 

$

3,393,182

 

$

92,893

 

$

3,486,075

 


(1)

All revenues are from external customers

(2)

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

(3)

Excludes parent company assets, which consist primarily of deferred tax asset of $18.4 million.

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2014

 

 

 

Mortgage Banking

 

Investment

 

 

 

 

 

    

Production

    

Servicing

    

Total

    

Management

    

 Total

  

 

 

(in thousands)

 

Revenues: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains on mortgage loans held for sale at fair value

 

$

158,758

 

$

8,266

 

$

167,024

 

$

 —

 

$

167,024

 

Loan origination fees

 

 

41,576

 

 

 —

 

 

41,576

 

 

 —

 

 

41,576

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

48,719

 

 

 —

 

 

48,719

 

 

 —

 

 

48,719

 

Net servicing fees

 

 

 —

 

 

216,919

 

 

216,919

 

 

 —

 

 

216,919

 

Management fees

 

 

 —

 

 

 —

 

 

 —

 

 

42,508

 

 

42,508

 

Carried Interest from Investment Funds

 

 

 —

 

 

 —

 

 

 —

 

 

6,156

 

 

6,156

 

Net interest income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

21,873

 

 

5,893

 

 

27,766

 

 

5

 

 

27,771

 

Interest expense

 

 

12,143

 

 

25,114

 

 

37,257

 

 

 —

 

 

37,257

 

 

 

 

9,730

 

 

(19,221)

 

 

(9,491)

 

 

5

 

 

(9,486)

 

Other

 

 

1,890

 

 

1,275

 

 

3,165

 

 

318

 

 

3,483

 

Total net revenue

 

 

260,673

 

 

207,239

 

 

467,912

 

 

48,987

 

 

516,899

 

Expenses

 

 

125,054

 

 

141,314

 

 

266,368

 

 

28,876

 

 

295,244

 

Income before provision for income taxes and non-segment activities

 

 

135,619

 

 

65,925

 

 

201,544

 

 

20,111

 

 

221,655

 

Non-segment activities (2)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,378

 

Income before provision for income taxes

 

$

135,619

 

$

65,925

 

$

201,544

 

$

20,111

 

$

223,033

 

Segment assets at year end (3)

 

$

1,040,358

 

$

1,320,092

 

$

2,360,450

 

$

92,881

 

$

2,453,331

 


(1)

All revenues are from external customers.

(2)

Represents repricing of Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement.

(3)

Excludes parent Company assets, which consist primarily of deferred tax asset of $46.0 million.million

 

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2013

 

 

 

Mortgage Banking

 

Investment

 

 

 

 

 

    

Production

    

Servicing

    

Total

    

Management

    

 Total

 

 

 

(in thousands)

 

Revenues (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains on mortgage loans held for sale at fair value

 

$

138,013 

 

$

 —

 

$

138,013 

 

$

 —

 

$

138,013 

 

Loan origination fees

 

 

23,575 

 

 

 —

 

 

23,575 

 

 

 —

 

 

23,575 

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

79,712 

 

 

 —

 

 

79,712 

 

 

 —

 

 

79,712 

 

Net servicing fees

 

 

 —

 

 

90,010 

 

 

90,010 

 

 

 —

 

 

90,010 

 

Management fees

 

 

 —

 

 

 —

 

 

 —

 

 

40,330 

 

 

40,330 

 

Carried Interest from Investment Funds

 

 

 —

 

 

 —

 

 

 —

 

 

13,419 

 

 

13,419 

 

Net interest income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

15,610 

 

 

 —

 

 

15,610 

 

 

22 

 

 

15,632 

 

Interest expense

 

 

11,103 

 

 

5,570 

 

 

16,673 

 

 

 —

 

 

16,673 

 

 

 

 

4,507 

 

 

(5,570)

 

 

(1,063)

 

 

22 

 

 

(1,041)

 

Other

 

 

912 

 

 

244 

 

 

1,156 

 

 

1,385 

 

 

2,541 

 

Total net revenue

 

 

246,719 

 

 

84,684 

 

 

331,403 

 

 

55,156 

 

 

386,559 

 

Expenses

 

 

120,699 

 

 

64,636 

 

 

185,335 

 

 

19,098 

 

 

204,433 

 

Income before provision for income taxes

 

$

126,020 

 

$

20,048 

 

$

146,068 

 

$

36,058 

 

$

182,126 

 

Segment assets at year end (2)

 

$

607,989 

 

$

795,320 

 

$

1,403,309 

 

$

117,341 

 

$

1,520,650 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2012

 

 

 

Mortgage

 

Investment

 

 

 

 

 

    

Banking

    

Management

    

Total

    

 

 

(in thousands)

 

Revenues (1)

 

 

 

 

 

 

 

 

 

 

Net gains on mortgage loans held for sale at fair value

 

$

118,170 

 

$

 —

 

$

118,170 

 

Loan origination fees

 

 

9,634 

 

 

 —

 

 

9,634 

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

62,906 

 

 

 —

 

 

62,906 

 

Net servicing fees

 

 

40,105 

 

 

 —

 

 

40,105 

 

Management fees

 

 

 —

 

 

21,799 

 

 

21,799 

 

Carried Interest from Investment Funds

 

 

 —

 

 

10,473 

 

 

10,473 

 

Net interest income (expense):

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

6,349 

 

 

 

 

6,354 

 

Interest expense

 

 

7,879 

 

 

 —

 

 

7,879 

 

 

 

 

(1,530)

 

 

 

 

(1,525)

 

Other

 

 

 

 

3,522 

 

 

3,524 

 

Total net revenue

 

 

229,287 

 

 

35,799 

 

 

265,086 

 

Expenses

 

 

136,109 

 

 

10,654 

 

 

146,763 

 

Income before provision for income taxes

 

$

93,178 

 

$

25,145 

 

$

118,323 

 

Segment assets at year end

 

$

761,949 

 

$

70,214 

 

$

832,163 

 


(1)

All revenues are from external customers.

(2)

Excludes parent Company assets, which consist primarily of deferred tax asset of $63.1 million.

F-63


Table of Contents

Note 27—26—Selected Quarterly Results (Unaudited)

Following is a presentation of selected quarterly financial data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended

 

 

 

2016

 

2015

 

 

 

Dec. 31

 

Sept. 30

 

June. 30

 

Mar. 31

 

Dec. 31

 

Sept. 30

 

June. 30

 

Mar. 31

 

 

 

 

(in thousands, except per share data)

 

During the quarter:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains on mortgage loans held for sale at fair value

    

$

127,932

    

$

182,121

    

$

130,203

    

$

91,524

    

$

78,736

    

$

82,646

    

$

83,955

    

$

75,378

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

27,164

 

 

27,255

 

 

19,111

 

 

12,935

 

 

12,855

 

 

17,553

 

 

15,333

 

 

12,866

 

Net mortgage loan servicing fees

 

 

95,528

 

 

45,864

 

 

26,555

 

 

17,519

 

 

76,959

 

 

57,258

 

 

68,549

 

 

26,776

 

Management fees and Carried Interest

 

 

5,619

 

 

5,628

 

 

5,974

 

 

6,505

 

 

6,059

 

 

7,939

 

 

7,145

 

 

9,722

 

Other income

 

 

33,042

 

 

30,527

 

 

25,963

 

 

14,918

 

 

12,631

 

 

23,809

 

 

21,369

 

 

15,572

 

 

 

 

289,285

 

 

291,395

 

 

207,806

 

 

143,401

 

 

187,240

 

 

189,205

 

 

196,351

 

 

140,314

 

Expenses

 

 

159,877

 

 

152,117

 

 

123,548

 

 

113,262

 

 

110,007

 

 

115,282

 

 

121,552

 

 

87,076

 

Income before provision for income taxes

 

 

129,408

 

 

139,278

 

 

84,258

 

 

30,139

 

 

77,233

 

 

73,923

 

 

74,799

 

 

53,238

 

Provision for income taxes

 

 

15,568

 

 

16,976

 

 

9,963

 

 

3,596

 

 

8,327

 

 

8,575

 

 

8,619

 

 

6,114

 

Net income

 

 

113,840

 

 

122,302

 

 

74,295

 

 

26,543

 

 

68,906

 

 

65,348

 

 

66,180

 

 

47,124

 

Less: Net income attributable to noncontrolling interest

 

 

91,096

 

 

98,617

 

 

59,820

 

 

21,368

 

 

56,135

 

 

52,668

 

 

53,431

 

 

38,096

 

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

 

$

22,744

 

$

23,685

 

$

14,475

 

$

5,175

 

$

12,771

 

$

12,680

 

$

12,749

 

$

9,028

 

Earnings per share of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.02

 

$

1.07

 

$

0.66

 

$

0.24

 

$

0.58

 

$

0.58

 

$

0.59

 

$

0.42

 

Diluted

 

$

1.00

 

$

1.06

 

$

0.65

 

$

0.23

 

$

0.58

 

$

0.58

 

$

0.59

 

$

0.42

 

Quarter end:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans held for sale at fair value

 

$

2,172,815

 

$

3,127,377

 

$

2,097,138

 

$

1,653,963

 

$

1,101,204

 

$

1,696,980

 

$

1,594,262

 

$

1,353,944

 

Mortgage servicing rights

 

 

1,627,672

 

 

1,337,674

 

 

1,290,928

 

 

1,337,082

 

 

1,411,935

 

 

1,307,392

 

 

1,135,510

 

 

790,411

 

Carried Interest from Investment Funds

 

 

70,906

 

 

70,870

 

 

70,763

 

 

70,519

 

 

69,926

 

 

70,196

 

 

68,713

 

 

68,531

 

Servicing advances, net

 

 

348,306

 

 

306,150

 

 

296,581

 

 

284,140

 

 

299,354

 

 

252,172

 

 

244,806

 

 

242,397

 

Other assets

 

 

914,203

 

 

754,123

 

 

860,910

 

 

635,559

 

 

622,875

 

 

488,582

 

 

387,314

 

 

402,718

 

Total assets

 

$

5,133,902

 

$

5,596,194

 

$

4,616,320

 

$

3,981,263

 

$

3,505,294

 

$

3,815,322

 

$

3,430,605

 

$

2,858,001

 

Assets sold under agreements to repurchase

 

$

1,735,114

 

$

2,491,366

 

$

1,591,798

 

$

1,658,578

 

$

1,166,731

 

$

1,286,411

 

$

1,263,248

 

$

992,187

 

Mortgage loan participation and sale agreement

 

 

671,426

 

 

782,913

 

 

737,176

 

 

246,636

 

 

234,872

 

 

247,410

 

 

195,959

 

 

190,762

 

Notes payable

 

 

150,942

 

 

110,619

 

 

114,235

 

 

127,693

 

 

61,136

 

 

406,990

 

 

246,456

 

 

134,665

 

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

 

 

288,669

 

 

280,367

 

 

294,551

 

 

321,976

 

 

412,425

 

 

418,573

 

 

359,102

 

 

222,309

 

Other liabilities

 

 

888,395

 

 

640,525

 

 

707,707

 

 

533,167

 

 

567,780

 

 

466,631

 

 

446,367

 

 

465,242

 

Total liabilities

 

 

3,734,546

 

 

4,305,790

 

 

3,445,467

 

 

2,888,050

 

 

2,442,944

 

 

2,826,015

 

 

2,511,132

 

 

2,005,165

 

Total equity

 

 

1,399,356

 

 

1,290,404

 

 

1,170,853

 

 

1,093,213

 

 

1,062,350

 

 

989,307

 

 

919,473

 

 

852,836

 

Total liabilities and equity

 

$

5,133,902

 

$

5,596,194

 

$

4,616,320

 

$

3,981,263

 

$

3,505,294

 

$

3,815,322

 

$

3,430,605

 

$

2,858,001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended

 

 

 

2014

 

2013

 

 

 

Dec. 31

 

Sept. 30

 

June. 30

 

Mar. 31

 

Dec. 31

 

Sept. 30

 

June. 30

 

Mar. 31

 

 

 

 

(in thousands, except per share data)

 

During the quarter:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains on mortgage loans held for sale at fair value

    

$

44,649 

    

$

48,133 

    

$

39,704 

    

$

34,538 

    

$

29,453 

    

$

25,949 

    

$

42,654 

    

$

39,957 

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

11,887 

 

 

15,497 

 

 

12,433 

 

 

8,902 

 

 

11,087 

 

 

18,327 

 

 

22,054 

 

 

28,244 

 

Net servicing fees

 

 

62,278 

 

 

53,908 

 

 

56,969 

 

 

43,764 

 

 

30,500 

 

 

21,399 

 

 

22,069 

 

 

16,042 

 

Management fees and Carried Interest

 

 

10,285 

 

 

13,281 

 

 

12,832 

 

 

12,266 

 

 

13,963 

 

 

13,352 

 

 

13,291 

 

 

13,143 

 

Other income

 

 

12,626 

 

 

9,806 

 

 

8,497 

 

 

6,022 

 

 

5,417 

 

 

8,167 

 

 

6,509 

 

 

4,982 

 

 

 

 

141,725 

 

 

140,625 

 

 

130,435 

 

 

105,492 

 

 

90,420 

 

 

87,194 

 

 

106,577 

 

 

102,368 

 

Expenses

 

 

88,492 

 

 

77,933 

 

 

72,388 

 

 

56,431 

 

 

48,733 

 

 

52,277 

 

 

56,348 

 

 

47,075 

 

Income before provision for income taxes

 

 

53,233 

 

 

62,692 

 

 

58,047 

 

 

49,061 

 

 

41,687 

 

 

34,917 

 

 

50,229 

 

 

55,293 

 

Provision for income taxes

 

 

7,337 

 

 

7,232 

 

 

6,630 

 

 

5,523 

 

 

4,430 

 

 

3,493 

 

 

2,038 

 

 

 —

 

Net income

 

 

45,896 

 

 

55,460 

 

 

51,417 

 

 

43,538 

 

 

37,257 

 

 

31,424 

 

 

48,191 

 

$

55,293 

 

Less: Net income attributable to noncontrolling interest

 

 

37,133 

 

 

44,971 

 

 

41,799 

 

 

35,566 

 

 

30,847 

 

 

26,227 

 

 

45,398 

 

 

 

 

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

 

$

8,763 

 

$

10,489 

 

$

9,618 

 

$

7,972 

 

$

6,410 

 

$

5,197 

 

$

2,793 

 

 

 

 

Earnings per share of Common Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.41 

 

$

0.49 

 

$

0.49 

 

$

0.38 

 

$

0.33 

 

$

0.29 

 

$

0.22 

 

 

 

 

Diluted

 

$

0.41 

 

$

0.49 

 

$

0.45 

 

$

0.38 

 

$

0.32 

 

$

0.28 

 

$

0.22 

 

 

 

 

Quarter end:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans held for sale at fair value

 

$

1,147,884 

 

$

1,259,991 

 

$

1,000,415 

 

$

717,476 

 

$

531,004 

 

$

530,248 

 

$

656,341 

 

$

203,661 

 

Mortgage servicing rights

 

 

730,828 

 

 

677,413 

 

 

621,681 

 

 

529,128 

 

 

483,664 

 

 

252,858 

 

 

199,738 

 

 

146,992 

 

Carried Interest from Investment Funds

 

 

67,298 

 

 

67,035 

 

 

65,133 

 

 

63,299 

 

 

61,142 

 

 

58,134 

 

 

55,322 

 

 

52,460 

 

Servicing advances, net

 

 

228,630 

 

 

195,246 

 

 

179,169 

 

 

171,395 

 

 

154,328 

 

 

105,344 

 

 

94,791 

 

 

96,587 

 

Other assets

 

 

332,485 

 

 

338,942 

 

 

315,796 

 

 

279,247 

 

 

354,337 

 

 

307,800 

 

 

274,588 

 

 

193,277 

 

Total assets

 

$

2,507,125 

 

$

2,538,627 

 

$

2,182,194 

 

$

1,760,545 

 

$

1,584,475 

 

$

1,254,384 

 

$

1,280,780 

 

$

692,977 

 

Assets sold under agreements to repurchase

 

$

822,621 

 

$

929,747 

 

$

825,267 

 

$

567,737 

 

$

471,592 

 

$

387,883 

 

$

500,427 

 

$

180,049 

 

Mortgage loan participation and sale agreement

 

 

143,638 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Note payable

 

 

146,855 

 

 

154,948 

 

 

115,314 

 

 

48,819 

 

 

52,154 

 

 

56,775 

 

 

47,209 

 

 

63,437 

 

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

 

 

191,166 

 

 

187,368 

 

 

190,244 

 

 

151,019 

 

 

138,723 

 

 

2,857 

 

 

 —

 

 

 —

 

Other liabilities

 

 

395,579 

 

 

500,115 

 

 

329,676 

 

 

317,892 

 

 

292,802 

 

 

216,908 

 

 

177,000 

 

 

141,748 

 

Total liabilities

 

 

1,699,859 

 

 

1,772,178 

 

 

1,460,501 

 

 

1,085,467 

 

 

955,271 

 

 

664,423 

 

 

724,636 

 

 

385,234 

 

Total equity

 

 

807,266 

 

 

766,449 

 

 

721,693 

 

 

675,078 

 

 

629,204 

 

 

589,961 

 

 

556,144 

 

 

307,743 

 

Total liabilities and equity

 

$

2,507,125 

 

$

2,538,627 

 

$

2,182,194 

 

$

1,760,545 

 

$

1,584,475 

 

$

1,254,384 

 

$

1,280,780 

 

$

692,977 

 

F-64F-70


 

Table of Contents

Note 28—27—Parent Company Information

The Company’s debt financing agreements require PLS, PFSI’sthe Company’s indirect controlled subsidiary, to comply with financial covenants that include a minimum tangible net worth of $90 million. PLS is limited from transferring funds to the Parent by this minimum tangible net worth requirement.

 

PENNYMAC FINANCIAL SERVICES, INC.

CONDENSED BALANCE SHEET

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

December 31,

 

    

2014

    

2013

 

    

2016

    

2015

 

 

(in thousands)

 

 

(in thousands)

 

ASSETS

 

 

                    

 

 

                    

 

 

 

                    

 

 

                    

 

Cash

 

$

7,757 

 

$

707 

 

 

$

5,505

 

$

841

 

Investments in subsidiaries

 

 

244,814 

 

 

177,200 

 

 

 

472,792

 

 

344,007

 

Deferred tax asset

 

 

46,038 

 

 

63,117 

 

 

 

 —

 

 

18,378

 

Due from subsidiaries

 

 

3,585

 

 

3,818

 

Total assets

 

$

298,609 

 

$

241,024 

 

 

$

481,882

 

$

367,044

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

75,024 

 

$

71,056 

 

 

$

75,954

 

$

74,315

 

Payable to subsidiaries

 

 

 

 

50 

 

Income taxes payable

 

 

25,077

 

 

 —

 

Total liabilities

 

 

75,025 

 

 

71,106 

 

 

 

101,031

 

 

74,315

 

Stockholders' equity

 

 

223,584 

 

 

169,918 

 

 

 

380,851

 

 

292,729

 

Total liabilities and stockholders' equity

 

$

298,609 

 

$

241,024 

 

 

$

481,882

 

$

367,044

 

 

PENNYMAC FINANCIAL SERVICES, INC.

CONDENSED STATEMENT OF INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

Year ended December 31,

    

2014

    

2013

 

    

2016

    

2015

 

2014

 

(in thousands)

 

 

(in thousands)

Revenues

 

 

                    

 

 

                    

 

 

 

                    

 

 

                    

 

 

                    

Dividends from subsidiaries

 

$

11,900 

 

$

664 

 

Dividends from subsidiary

 

$

6,418

 

$

3,825

 

$

11,900

Interest

 

 

 —

 

 

 —

 

 

 

49

 

121

 

 

 —

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

 

 

1,378 

 

 

 —

 

 

 

551

 

 

(1,695)

 

 

1,378

Total revenue

 

 

13,278 

 

 

664 

 

 

 

7,018

 

 

2,251

 

 

13,278

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

 —

 

 

 —

 

 

 

 —

 

 

6

 

 

 —

Total expenses

 

 

 —

 

 

 —

 

 

 

 —

 

 

6

 

 

 —

Income before provision for income taxes and equity in undistributed earnings in subsidiaries

 

 

13,278 

 

 

664 

 

 

 

7,018

 

2,245

 

 

13,278

Provision for income taxes

 

 

26,722 

 

 

9,961 

 

 

 

46,103

 

 

31,635

 

 

26,722

Income before equity in undistributed earnings of subsidiaries

 

 

(13,444)

 

 

(9,297)

 

 

 

(39,085)

 

(29,390)

 

 

(13,444)

Equity in undistributed earnings of subsidiaries

 

 

50,286 

 

 

23,697 

 

 

 

105,164

 

 

76,618

 

 

50,286

Net income

 

$

36,842 

 

$

14,400 

 

 

$

66,079

 

$

47,228

 

$

36,842

 

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PENNYMAC FINANCIAL SERVICES, INC.

CONDENSED STATEMENT OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

    

2016

    

2015

 

2014

 

 

(in thousands)

Cash flows from operating activities

 

 

                    

 

 

                    

 

 

                    

Net income

 

$

66,079

 

$

47,228

 

$

36,842

Adjustments to reconcile net income to net cash provided by (used in ) operating activities

 

 

 

 

 

 

 

 

 

Equity in undistributed earnings of subsidiaries

 

 

(105,164)

 

 

(76,618)

 

 

(50,286)

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

 

 

(551)

 

 

1,695

 

 

(1,378)

Decrease in deferred tax asset

 

 

18,668

 

 

29,730

 

 

21,922

Decrease in intercompany receivable

 

 

(76)

 

 

(3,819)

 

 

 —

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

 

 

 —

 

 

(5,132)

 

 

 —

Decrease in payables to subsidiaries

 

 

 —

 

 

 —

 

 

(50)

Increase in income taxes payable

 

 

25,559

 

 

 —

 

 

 —

Net cash provided by (used in)  operating activities

 

 

4,515

 

 

(6,916)

 

 

7,050

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

Proceeds from common stock options exercised

 

 

149

 

 

 —

 

 

 —

Net cash provided by financing activities

 

 

149

 

 

 —

 

 

 —

Net change in cash

 

 

4,664

 

 

(6,916)

 

 

7,050

Cash at beginning of year

 

 

841

 

 

7,757

 

 

707

Cash at end of year

 

$

5,505

 

$

841

 

$

7,757

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31,

 

 

    

2014

    

2013

 

 

 

(in thousands)

 

Cash flows from operating activities

 

 

                    

 

 

                    

 

Net income

 

$

36,842 

 

$

14,400 

 

Equity in undistributed earnings of subsidiaries

 

 

(50,286)

 

 

(23,697)

 

(Decrease) increase in payables to subsidiaries

 

 

(50)

 

 

50 

 

Decrease in deferred tax asset

 

 

21,922 

 

 

9,954 

 

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

 

 

(1,378)

 

 

 —

 

Net cash provided by operating activities

 

 

7,050 

 

 

707 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Increase in investments in subsidiaries

 

 

 —

 

 

(216,775)

 

Net cash used by investing activities

 

 

 —

 

 

(216,775)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Issuance of common shares

 

 

 —

 

 

230,000 

 

Payment of common share underwriting and offering costs

 

 

 —

 

 

(13,225)

 

Net cash provided by financing activities

 

 

 —

 

 

216,775 

 

Net change in cash

 

 

7,050 

 

 

707 

 

Cash at beginning of year

 

 

707 

 

 

 —

 

Cash at end of year

 

$

7,757 

 

$

707 

 

 

 

 

 

Note 29—28—Recently Issued Accounting Pronouncements

 

In January ofMay 2014, the FASB issued Accounting StandardStandards Update (“ASU”) No. 2014-04,ASU 2014-09, Receivables: Troubled Debt Restructuring by Creditors Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure Revenue from Contracts with Customers (Subtopic 606)(“ASU 2014-04”2014-09”), which supersedes the guidance in ASC 605, Revenue Recognition. ASU 2014-09 clarifies the principles for recognizing revenue in order to improve comparability of revenue recognition practices across entities and industries with certain scope exceptions including financial instruments, leases, and guarantees. ASU 2014-09 provides guidance intended to assist in the identification of contracts with customers and separate performance obligations within those contracts, the determination and allocation of the transaction price to those identified performance obligations and the recognition of revenue when a performance obligation has been satisfied. ASU 2014-09 also requires disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers.

Upon adoption, ASU 2014-09 provides for transition through either a full retrospective approach requiring the restatement of all presented prior periods or a modified retrospective approach, which allows the new recognition standard to be applied to only those contracts that are not completed at the date of transition. If the modified retrospective approach is adopted, a cumulative-effect adjustment to retained earnings is performed with additional disclosures required including the amount by which each line item is affected by the transition as compared to the Troubled Debt Restructuring subtopicguidance in effect before adoption and an explanation of the reasons for significant changes in these amounts.

The FASB has issued several amendments to ASU 2014-09, including:

·

In May 2014, ASU 2015-14, Revenue From Contracts With Customers (“ASU 2015-14”). This update deferred the initial effective date of ASU 2014-09. As a result of the issuance of ASU 2015-14, ASU 2014-09 is effective for annual reporting periods beginning on or after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted only as of annual reporting

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periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

·

In March 2015, ASU 2016-08, Principal Versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments to this update are intended to improve the implementation guidance on principal versus agent considerations in ASU 2014-09 by clarifying how an entity should identify the unit of account (i.e. the specified good or service) and how an entity should apply the control principle to certain types of arrangements.

·

In May 2016, ASU 2016-12, Narrow-Scope Improvements and Practical Expedients. The amendments to this update clarify certain core recognition principles and provide practical expedients available at transition. The improvements address collectability, sales tax presentation, noncash consideration, contract modifications and completed contracts at transition.

·

In December 2016, ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The amendments to this update affect narrow aspects of the guidance issued in ASU 2014-09. The amendments remove certain items under its scope and clarify application of certain principles. The amendments address loan guarantee fees, contracts costs impairment testing, provisions for losses on construction, insurance contracts, disclosure of remaining performance obligations, contract modifications, contract asset versus receivable, refund liability, advertising cost, fixed-odds wagering contracts in the casino industry and cost capitalization for advisor to private funds and public funds.

The Company expects that upon adoption, the guidance currently applied by the Company to its Carried Interest may be affected. The Company’s Carried Interest arrangements with the Investment Funds represent capital allocations to PFSI. The Company is currently evaluating whether the nature and substance of its Carried Interest arrangements are within the scope of ASU 2014-09, or whether such Carried Interest should be accounted for under the equity method of accounting under the ReceivablesInvestments Equity Method and Joint Ventures topic of the ASC.

 

ASU 2014-04 clarifies when a creditorIf the Company concludes the Carried Interest should be considered to have received physical possessionaccounted for under the equity method of residential real estate collateralizing a mortgage loan and the mortgage loan derecognized in the receivable and recognized as real estate property. ASU 2014-04 specifies that an in substance repossession occurs when either the creditor has obtained the legal title to the property after a foreclosure or the borrower has transferred all interest in the property to the creditor through a deed in lieu of foreclosure or similar legal agreement so that at that time the asset shouldaccounting, Carried Interest would be reclassified from Mortgage loans at fair value to Real estate acquired in settlement of loans.  

ASU 2014-04 also provides that a disclosure of the amount of Real estate acquired in settlement of loans and the recorded investment in Mortgage loans at fair value that are in the process of foreclosure must be included in both interim and annual financial statements.

ASU 2014-04 is effective for all year-end and interim periods beginning after December 15, 2014. The adoption of ASU 2014-04 is not expected to have a material effect on the Company’s consolidated financial statements.

In May of 2014, the FASB issued ASU No 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) to the Revenue from Contracts with Customers topic of the ASC. ASU 2014-09 was issued to standardize revenue recognition between public and private companies as well as across industries in an effort to more closely align GAAP revenue recognition with international standards to provide a more comparable revenue number for the users of the financial statements.

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ASU 2014-09 specifies that for all contracts, revenue should be recognized when or as the entity satisfies a performance obligation. Revenue is recognized either over a period or at one point in time in accordance with how the control of the service or good is transferred.

ASU 2014-09 is effective for all year-end and interim periods beginning after December 15, 2016 and early application is not permitted. The Company is evaluating the adoption of ASU 2014-09 and the effect that ASU 2014-09 will have on its consolidated financial statements.

In June of 2014, the FASB issued ASU No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (“ASU 2014-11”) to the Transfers and Servicing topic of the ASC. The amendments in ASU 2014-11 require two accounting changes. First, the amendments in ASU 2014-11 change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement.

ASU 2014-11 requires disclosures for certain transactions comprising (1) a transfer of a financial asset accounted for as a salefinancial instrument and (2) an agreement with the same transferee entered into in contemplation ofamount recognized by the initial transfer that results inCompany would not change significantly.  The Company is still determining the transferor retaining substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. ASU 2014-11 also specifies certain disclosure requirements for those transactions outstanding at the reporting date and for repurchase agreements, securities lending transactions and repurchase-to-maturity transactions, the transferor is required to make certain disclosures by type of transaction.

ASU 2014-11 is effective for the annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The adoptionpotential additional effects of ASU 2014-11 is not expected to have a material effect2014-09 on its financial statements for other arrangements that may be within the Company’s consolidated financial statements.scope of ASU 2014-09.

 

In August of 2014, the FASB issued ASUAccounting Standards Update No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”) to the Going Concern subtopic of the Presentation of Financial Statements topic of the ASC.. ASU 2014-15 requires that when management identifies conditions or events that raiseis intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related note disclosures.

Under GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. Financial reporting under this presumption is commonly referred to as the going concern basis of accounting. The going concern basis of accounting establishes the fundamental basis for measuring and classifying assets and liabilities.

Under ASU 2014-15, an entity would be required to evaluate its status as a going concern as part of its periodic financial statement preparation process and would be required to disclose information about its potential inability to continue as a going concern when “substantial doubt” about its ability to continue as a going concern for the period of one year from the earlier of the date its financial statements are issued or are ready to be issued.

If management concludes that there is “substantial doubt” about the entity’s ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those relevantit must disclose the principal conditions or events will alleviate the substantial doubt.

ASU 2014-15 requires that if conditions or events raisecausing substantial doubt about an entity’s ability to continue as a going concern, butbe raised, management’s

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evaluation of the conditions and management’s plans. If substantial doubt is not alleviated as a result of consideration of management’s plans, the entity shouldcompany is required to include a statement in the notes to its financial statements that enables users of the financial statements to understand all of the following:

a.

Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans)

b.

Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations

c.Management’s plans that alleviated substantialthere is “substantial doubt about the entity’s ability to continue as a going concern.

If conditions or events raise” ASU 2014-15 also requires an entity to disclose how the substantial doubt about an entity’s ability to continue as a going concern, andwas resolved in the period that substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the notes to its financial statements indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). The entity should disclose information that enables users of the financial statements to understand all of the following:

a.

Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

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b.

Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations.

c.Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.no longer exists.

 

ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.31, 2016. The adoption of ASU 2014-15 isdid not expected to have a materialan effect on the Company’s consolidated financial statements.statements of the Company.

 

TheIn February 2015, the FASB has issued an ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis which is intended to improve targeted areas of consolidation guidance for legal(“ASU 2015-02”). ASU 2015-02 affects reporting entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions).

The ASU focuses on the consolidation evaluation for reporting organizations (public and private companies and not-for-profit organizations) that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company adopted ASU 2015-02 effective January 1, 2016. The adoption of ASU 2015-02 had no effect on the Company’s consolidated financial statements.

In addition to reducing the number of consolidation models from four to two, the new standard simplifiesJanuary 2016, the FASB Accounting Standards Codificationissued ASU 2016-01, Financial Instruments–Overall: Recognition and improves current GAAP by:Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 affects the accounting for equity investments, financial liabilities under the fair value option, the presentation and disclosure requirements for financial instruments, and the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities.

ASU 2016-01 requires that:

·

Placing more emphasis on riskAll equity investments in unconsolidated entities (other than those accounted for using the equity method of loss when determining a controlling financial interest. A reporting organization may no longer have to consolidate a legal entity in certain circumstances based solely on its fee arrangement, when certain criteria are met.accounting) with readily determinable fair values will generally be measured at fair value through earnings.

·

ReducingWhen the frequency offair value option has been elected for financial liabilities, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. The accumulated gains and losses due to these changes will be reclassified from accumulated other comprehensive income to earnings if the application of related-party guidance when determining a controlling financial interest in a VIE.liability is settled before maturity.

·

Changing consolidation conclusionsFor financial instruments measured at amortized cost, public business entities will be required to use the exit price when measuring the fair value of financial instruments for publicdisclosure purposes.

·

Financial assets and private companiesfinancial liabilities shall be presented separately in several industries that typically make usethe notes to the financial statements, grouped by measurement category (e.g., fair value, amortized cost, lower of limited partnershipscost or VIEs.fair value) and form of financial asset (e.g., loans, securities).

·

Public business entities will no longer be required to disclose the methods and significant assumptions used to estimate the fair value of financial instruments carried at amortized cost.

·

Entities will have to assess the realizability of a deferred tax asset related to a debt security classified as available for sale in combination with the entity’s other deferred tax assets.

The classification and measurement guidance will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption of the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income is permitted and can be elected for all financial statements of fiscal years and interim periods that have not yet been issued or that have not yet been made available for issuance. The Company does not expect that the adoption of ASU 2016-01will have an effect on its consolidated financial statements.

The changes are

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”).  ASU 2016-02 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a

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contract (i.e. lessees and lessors) and supersedes previous leasing standards. ASU 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether the lease is effectively a financed purchase of the leased asset by the lessee. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. 

ASU 2016-02 is effective for the Company in the first quarter 2016for reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is evaluatingcurrently assessing the potential impact that the Updateadoption of ASU 2016-02 will have on its consolidated financial statements. As shown in Note 24 - Commitments and Contingencies, the Company had approximately $100.8 million in future minimum lease payment commitments as of December 31, 2016. Were the Company to adopt ASU 2016-02 as of December 31, 2016, it would be required to recognize a right-of-use asset and a corresponding liability based on the present value of such obligation as of December 31, 2016. The Company does not expect to recognize a significant cumulative effect adjustment to its stockholders’ equity as a result of adopting ASU 2016-02.

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment award transactions, including:

·

Modifies the accounting for income taxes relating to share-based payments. All excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) will be recognized as income tax expense or benefit in the consolidated income statement. The tax effects of exercised or vested awards will be treated as discrete items in the reporting period in which they occur. An entity will recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Under current GAAP, excess tax benefits are recognized in additional paid-in capital; tax deficiencies are recognized either as an offset to accumulated excess tax benefits, if any, or in the consolidated income statement in the period they reduce income taxes payable.

·

Changes the classification of excess tax benefits on the consolidated statement of cash flows. In the consolidated statement of cash flows, excess tax benefits will be classified along with other income tax cash flows as an operating activity. Under current GAAP, excess tax benefits are separated from other income tax cash flows and classified as a financing activity.

·

Changes the requirement to estimate the number of awards that are expected to vest. Under ASU 2016-09, an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest as presently required or account for forfeitures when they occur. Under current GAAP, accruals of compensation cost are based on the number of awards that are expected to vest.

·

Changes the tax withholding requirements for share-based payment awards to qualify for equity accounting. The threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions. Under current GAAP, for an award to qualify for equity classification is that an entity cannot partially settle the award in cash in excess of the employer’s minimum statutory withholding requirements.

·

Establishes GAAP for the classification of employee taxes paid when an employer withholds shares for tax withholding purposes. Cash paid by an employer when directly withholding shares for tax- withholding purposes should be classified as a financing activity. This guidance establishes GAAP related to the classification of withholding taxes in the statement of cash flows as there is no such guidance under current GAAP.

ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any organization in any interim or annual period. The Company does not expect the adoption of ASU 2016-09 to have a significant effect on its consolidated financial statements.

 

 

 

 

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Note 30—29—Subsequent Events

Management has evaluated all events and transactions through the date the Company issued these consolidated financial statements. During this period:

·

On February 3, 2015,16, 2017, the Company, entered intothrough the Issuer Trust, issued an aggregate principal amount of $400 million in Term Notes to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended.  The Term Notes bear interest at a letter of intent with a third partyrate equal to acquire a $15.9 billion UPB portfolio of Agency MSRs. PMT intends to purchase from the Company approximately $140 million of ESS from this MSR portfolio.one-month LIBOR plus 4.75% per annum, payable each month beginning in February 2017. The MSR acquisition by the Company and PMT’s purchase of ESS are subjectTerm Notes will mature on February 25, 2020 or, if extended pursuant to the negotiationterms of the related indenture supplement, February 25, 2021 (unless earlier redeemed in accordance with their terms).  The Term Notes rank pari passu with the VFN issued by Issuer Trust to PLS and execution of definitive documentation, continuing due diligenceare secured by certain participation certificates relating to Ginnie Mae MSRs and customary closing conditions, including required regulatory approvals. There can be no assuranceESS that are financed pursuant to the committed amounts will ultimately be acquired or that the transactions will be completed at all.GNMA MSR Facility.

·

On March 2, 2015,3, 2017, the Company, acquiredthrough PLS, amended and restated a master repurchase agreement, by and between Citibank, N.A. (“Citibank”) and PLS, pursuant to which PLS may sell to, and later repurchase from, a third party a  $3.9 billion UPB portfolio of Agency MSRs, and PMTCitibank certain newly originated mortgage loans that are originated through the PLS consumer direct lending channel or purchased from the Company approximately $29correspondent sellers through a subsidiary of PMT and, in either case, held by PLS pending sale and/or securitization. This repurchase agreement is committed to March 2, 2018 and provides for a maximum aggregate purchase price of $400 million, of ESSwhich $200 million is committed.  In connection with the amendment and restatement, the committed amount was increased from this MSR portfolio.$150 million to $200 million.

 

 

 

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SIGNATURES

 

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.

 

PENNYMAC FINANCIAL SERVICES, INC.

 

PENNYMAC FINANCIAL SERVICES, INC.
(Registrant)

 

By:

/s/ Stanford L. KurlandDavid A. Spector

 

 

Stanford L. Kurland
Chairman of the Board of DirectorsDavid A. Spector

President and

Chief Executive Officer

(Principal Executive Officer)

 

Dated: March 13, 20159, 2017

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

    

Title

    

Date

 

 

 

 

 

Signatures/s/ David A. Spector

 

TitlePresident and Chief Executive Officer

 

March 9, 2017

David A. Spector

Date

(Principal Executive Officer)

 

/s/ Stanford L. Kurland

Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)

March 13, 2015

Stanford L. Kurland

 

 

 

/s/ Anne D. McCallionAndrew S. Chang

Chief Financial Officer (Principal

March 9, 2017

Andrew S. Chang

(Principal Financial Officer)

March 13, 2015

Anne D. McCallion

 

 

 

/s/ Gregory L. Hendry

Chief Accounting Officer (Principal Accounting Officer)

March 13, 20159, 2017

Gregory L. Hendry

(Principal Accounting Officer)

 

 

 

/s/ David A. SpectorStanford L. Kurland

Director

Executive Chairman

March 13, 20159, 2017

David A. SpectorStanford L. Kurland

 

 

 

/s/ Matthew Botein

Director

March 13, 20159, 2017

Matthew Botein

 

/s/ James Hunt

Director

March 13, 2015

James Hunt

 

 

 

/s/ PATRICK KINSELLAJames Hunt

Director

March 13, 20159, 2017

James Hunt

/s/ Patrick Kinsella

Director

March 9, 2017

Patrick Kinsella

 

 

 

/s/ Joseph Mazzella

Director

March 13, 20159, 2017

Joseph Mazzella

 

 

 

/s/ Farhad Nanji

Director

March 13, 20159, 2017

Farhad Nanji

 

 

 

/s/ Mark Wiedman

Director

March 13, 20159, 2017

Mark Wiedman

 

 

 

/s/ Emily Youssouf

Director

March 13, 20159, 2017

Emily Youssouf

 

 

 

 

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