10-Q 1 d931280d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

Form 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2015

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: 001-34416

 

 

PennyMac Mortgage Investment Trust

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   27-0186273

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

6101 Condor Drive, Moorpark, California   93021
(Address of principal executive offices)   (Zip Code)

(818) 224-7442

(Registrant’s telephone number, including area code)

 

 

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

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   x    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  x

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

 

Class

  

Outstanding at August 5, 2015

Common Shares of Beneficial Interest, $0.01 par value    74,811,922

 

 

 


Table of Contents

PENNYMAC MORTGAGE INVESTMENT TRUST

FORM 10-Q

June 30, 2015

TABLE OF CONTENTS

 

         Page  

Special Note Regarding Forward-Looking Statements

     1   

PART I. FINANCIAL INFORMATION

     4   

Item 1.

 

Financial Statements (Unaudited):

     4   
  Consolidated Balance Sheets      4   
 

Consolidated Statements of Income

     6   
 

Consolidated Statements of Changes in Shareholders’ Equity

     7   
 

Consolidated Statements of Cash Flows

     8   
 

Notes to Consolidated Financial Statements

     10   

Item 2.

 

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

     58   
 

Observations on Current Market Conditions

     59   
 

Results of Operations

     61   
 

Net Investment Income

     62   
 

Expenses

     78   
 

Balance Sheet Analysis

     82   
 

Asset Acquisitions

     83   
 

Investment Portfolio Composition

     84   
 

Cash Flows

     90   
 

Liquidity and Capital Resources

     91   
 

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

     94   
  Quantitative and Qualitative Disclosures About Market Risk      99   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     101   

Item 4.

 

Controls and Procedures

     101   

PART II. OTHER INFORMATION

     101   

Item 1.

 

Legal Proceedings

     101   

Item 1A.

 

Risk Factors

     102   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     102   

Item 3.

 

Defaults Upon Senior Securities

     102   

Item 4.

 

Mine Safety Disclosures

     102   

Item 5.

 

Other Information

     102   

Item 6.

 

Exhibits

     103   


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

 

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

 

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

 

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

 

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

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

You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 2, 2015.

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

 

    changes in our investment objectives or investment or operational strategies, including any new lines of business or new products and services that may subject us to additional risks;

 

    volatility in our industry, the debt or equity markets, the general economy or the real estate finance and real estate markets specifically, whether the result of market events or otherwise;

 

    events or circumstances which undermine confidence in the financial markets or otherwise have a broad impact on financial markets, such as the sudden instability or collapse of large depository institutions or other significant corporations, terrorist attacks, natural or man-made disasters, or threatened or actual armed conflicts;

 

    changes in general business, economic, market, employment and political conditions, or in consumer confidence and spending habits from those expected;

 

    declines in real estate or significant changes in U.S. housing prices or activity in the U.S. housing market;

 

    the availability of, and level of competition for, attractive risk-adjusted investment opportunities in mortgage loans and mortgage-related assets that satisfy our investment objectives;

 

    the inherent difficulty in winning bids to acquire distressed loans or correspondent loans, and our success in doing so;

 

    the concentration of credit risks to which we are exposed;

 

    the degree and nature of our competition;

 

    our dependence on our manager and servicer, potential conflicts of interest with such entities and their affiliates, and the performance of such entities;

 

    changes in personnel and lack of availability of qualified personnel at our manager, servicer or their affiliates;

 

    the availability, terms and deployment of short-term and long-term capital;

 

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    the adequacy of our cash reserves and working capital;

 

    our ability to maintain the desired relationship between our financing and the interest rates and maturities of our assets;

 

    the timing and amount of cash flows, if any, from our investments;

 

    unanticipated increases or volatility in financing and other costs, including a rise in interest rates;

 

    the performance, financial condition and liquidity of borrowers;

 

    the ability of our servicer, which also provides us with fulfillment services, to approve and monitor correspondent sellers and underwrite loans to investor standards;

 

    incomplete or inaccurate information or documentation provided by customers or counterparties, or adverse changes in the financial condition of our customers and counterparties;

 

    changes in the number of investor repurchases or indemnifications and our ability to obtain indemnification or demand repurchase from our correspondent sellers;

 

    the quality and enforceability of the collateral documentation evidencing our ownership and rights in the assets in which we invest;

 

    increased rates of delinquency, default and/or decreased recovery rates on our investments;

 

    our ability to foreclose on our investments in a timely manner or at all;

 

    increased prepayments of the mortgages and other loans underlying our mortgage-backed securities (“MBS”) or relating to our mortgage servicing rights (“MSRs”), excess servicing spread (“ESS”) and other investments;

 

    the degree to which our hedging strategies may or may not protect us from interest rate volatility;

 

    the effect of the accuracy of or changes in the estimates we make about uncertainties, contingencies and asset and liability valuations when measuring and reporting upon our financial condition and results of operations;

 

    our failure to maintain appropriate internal controls over financial reporting;

 

    technologies for loans and our ability to mitigate security risks and cyber intrusions;

 

    our ability to obtain and/or maintain licenses and other approvals in those jurisdictions where required to conduct our business;

 

    our ability to detect misconduct and fraud;

 

    our ability to comply with various federal, state and local laws and regulations that govern our business;

 

    developments in the secondary markets for our mortgage loan products;

 

    legislative and regulatory changes that impact the mortgage loan industry or housing market;

 

    changes in regulations or the occurrence of other events that impact the business, operations or prospects of government agencies such as the Government National Mortgage Association (“Ginnie Mae”), the Federal Housing Administration (the “FHA”), the Veterans Administration (the “VA”) or the U.S. Department of Agriculture (“USDA”), or government-sponsored entities such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an “Agency” and, collectively, as the “Agencies”), or such changes that increase the cost of doing business with such entities;

 

    the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and its implementing regulations and regulatory agencies, and any other legislative and regulatory changes that impact the business, operations or governance of mortgage lenders and/or publicly-traded companies;

 

    the mortgage lending and servicing-related regulations promulgated by the Consumer Financial Protection Bureau and its enforcement of the regulations;

 

    changes in government support of homeownership;

 

    changes in government or government-sponsored home affordability programs;

 

   

limitations imposed on our business and our ability to satisfy complex rules for us to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes and qualify for an exemption from registering as an investment company under the Investment Company Act of 1940 and the ability of certain of our subsidiaries

 

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to qualify as REITs or as taxable REIT subsidiaries (“TRSs”) for U.S. federal income tax purposes, as applicable, and our ability and the ability of our subsidiaries to operate effectively within the limitations imposed by these rules;

 

    changes in governmental regulations, accounting treatment, tax rates and similar matters (including changes to laws governing the taxation of REITs, or the exclusions from registration as an investment company);

 

    our ability to make distributions to our shareholders in the future;

 

    the effect of public opinion on our reputation;

 

    the occurrence of natural disasters or other events or circumstances that could impact our operations; and

 

    our organizational structure and certain requirements in our charter documents.

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

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

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

     June 30,
2015
     December 31,
2014
 
     (in thousands, except share data)  
ASSETS      

Cash

   $ 114,698       $ 76,386   

Short-term investments

     32,417         139,900   

Mortgage-backed securities at fair value (includes $278,305 and $307,363 pledged to secure assets sold under agreements to repurchase and $9,321 and $0 pledged to secure Federal Home Loan Bank advances)

     287,626         307,363   

Mortgage loans acquired for sale at fair value (includes $1,422,166 and $609,608 pledged to secure assets sold under agreements to repurchase, $72,819 and $20,862 pledged to secure mortgage loan participation and sale agreement, $48,627 and $0 pledged to secure Federal Home Loan Bank advances and $656,377 and $0 pledged to secure credit risk transfer financing)

     2,213,874         637,722   

Mortgage loans at fair value (includes $2,612,167 and $2,709,161 pledged to secure assets sold under agreements to repurchase and asset-backed secured financing of the variable interest entity at fair value and $106,303 and $0 pledged to secure Federal Home Loan Bank advances)

     2,730,820         2,726,952   

Excess servicing spread purchased from PennyMac Financial Services, Inc. at fair value pledged to secure borrowings under note payable to PennyMac Financial Services, Inc.

     359,102         191,166   

Derivative assets

     13,950         11,107   

Real estate acquired in settlement of loans (includes $203,051 and $150,649 pledged to secure assets sold under agreements to repurchase)

     324,278         303,228   

Real estate held for investment

     1,544         —     

Mortgage servicing rights pledged to secure borrowings under note payable (includes $57,343 and $57,358 carried at fair value)

     394,737         357,780   

Servicing advances

     78,347         79,878   

Due from PennyMac Financial Services, Inc.

     9,342         6,621   

Other assets

     116,639         59,155   
  

 

 

    

 

 

 

Total assets

   $ 6,677,374       $ 4,897,258   
  

 

 

    

 

 

 
LIABILITIES      

Assets sold under agreements to repurchase

   $ 3,500,569       $ 2,729,027   

Federal Home Loan Bank advances

     138,400         —     

Mortgage loan participation and sale agreement

     70,612         20,222   

Credit risk transfer financing at fair value

     649,120         —     

Note payable

     192,352         —     

Note payable to PennyMac Financial Services, Inc.

     52,526         —     

Asset-backed secured financing of the variable interest entity at fair value

     151,489         165,920   

Exchangeable senior notes

     244,559         244,079   

Derivative liabilities

     6,818         2,430   

Accounts payable and accrued liabilities

     75,967         67,806   

Due to PennyMac Financial Services, Inc.

     16,245         23,943   

Income taxes payable

     36,706         51,417   

Liability for losses under representations and warranties

     16,714         14,242   
  

 

 

    

 

 

 

Total liabilities

     5,152,077         3,319,086   
  

 

 

    

 

 

 

Commitments and contingencies

     
SHAREHOLDERS’ EQUITY      

Common shares of beneficial interest—authorized, 500,000,000 common shares of $0.01 par value; issued and outstanding, 74,811,922 and 74,510,159 common shares, respectively

     748         745   

Additional paid-in capital

     1,483,389         1,479,699   

Retained earnings

     41,160         97,728   
  

 

 

    

 

 

 

Total shareholders’ equity

     1,525,297         1,578,172   
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   $ 6,677,374       $ 4,897,258   
  

 

 

    

 

 

 

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

 

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

Assets and liabilities of consolidated variable interest entity (“VIE”) included in total assets and liabilities (the assets of the VIE can only be used to settle liabilities of the VIE):

 

     June 30,
2015
     December 31,
2014
 
     (in thousands)  
ASSETS      

Mortgage loans at fair value

   $ 483,876       $ 527,369   

Other assets - interest receivable

     1,543         1,651   
  

 

 

    

 

 

 
   $ 485,419       $ 529,020   
  

 

 

    

 

 

 
LIABILITIES   

Asset-backed secured financing at fair value

   $ 151,489       $ 165,920   

Accounts payable and accrued expenses - interest payable

     444         477   
  

 

 

    

 

 

 
   $ 151,933       $ 166,397   
  

 

 

    

 

 

 

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

 

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

     Quarter ended June 30,     Six months ended June 30,  
     2015     2014     2015     2014  
     (in thousands, except per share data)  

Net investment income

        

Interest income

        

From nonaffiliates

   $ 39,515      $ 45,380      $ 76,448      $ 81,863   

From PennyMac Financial Services, Inc.

     5,818        3,138        9,570        6,001   
  

 

 

   

 

 

   

 

 

   

 

 

 
     45,333        48,518        86,018        87,864   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

        

From nonaffiliates

     29,206        21,865        54,952        41,640   

From PennyMac Financial Services, Inc.

     533        —          533        —     
  

 

 

   

 

 

   

 

 

   

 

 

 
     29,739        21,865        55,485        41,640   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     15,594        26,653        30,533        46,224   

Net gain on mortgage loans acquired for sale

     11,175        10,222        21,335        20,193   

Loan origination fees

     7,279        4,485        12,566        6,841   

Net gain on investments:

        

From nonaffiliates

     14,025        80,671        23,719        126,157   

From PennyMac Financial Services, Inc.

     8,589        (7,537     2,342        (10,438
  

 

 

   

 

 

   

 

 

   

 

 

 
     22,614        73,134        26,061        115,719   

Net loan servicing fees

     13,017        8,758        21,019        16,179   

Results of real estate acquired in settlement of loans

     (1,806     (5,348     (7,638     (11,974

Other

     1,892        2,652        3,546        3,969   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     69,765        120,556        107,422        197,151   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

        

Expenses earned by PennyMac Financial Services, Inc.:

        

Loan fulfillment fees

     15,333        12,433        28,199        21,335   

Loan servicing fees

     12,136        14,180        22,806        28,771   

Management fees

     5,779        8,912        12,782        16,986   

Compensation

     1,389        1,883        4,198        4,825   

Professional services

     1,662        2,690        3,490        4,421   

Other

     8,378        7,154        14,679        11,221   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     44,677        47,252        86,154        87,559   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before benefit from income taxes

     25,088        73,304        21,268        109,592   

Benefit from income taxes

     (2,983     (1,907     (14,311     (3,492
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 28,071      $ 75,211      $ 35,579      $ 113,084   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share

        

Basic

   $ 0.37      $ 1.01      $ 0.46      $ 1.54   

Diluted

   $ 0.36      $ 0.93      $ 0.46      $ 1.44   

Weighted-average shares outstanding

        

Basic

     74,683        74,065        74,618        72,803   

Diluted

     83,480        82,750        74,997        81,535   

Dividends declared per share

   $ 0.61      $ 0.59      $ 1.22      $ 1.18   

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

 

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

 

     Common shares                     
     Number
of
shares
     Par
value
     Additional
paid-in
capital
    Retained
earnings
    Total  
     (in thousands)  

Balance at December, 2013

     70,458       $ 705       $ 1,384,468      $ 81,941      $ 1,467,114   

Net income

     —           —           —          113,084        113,084   

Share-based compensation

     234         2         2,956        —          2,958   

Dividends, $1.18 per share

     —           —           —          (87,397     (87,397

Issuance of common shares

     3,447         34         82,419        —          82,453   

Underwriting and offering costs

     —           —           (1,052     —          (1,052
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

     74,139       $ 741       $ 1,468,791      $ 107,628      $ 1,577,160   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

     74,510       $ 745       $ 1,479,699      $ 97,728      $ 1,578,172   

Net income

     —           —           —          35,579        35,579   

Share-based compensation

     302         3         3,682        —          3,685   

Dividends, $1.22 per share

     —           —           —          (92,147     (92,147

Issuance of common shares

     —           —           8        —          8   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

     74,812       $ 748       $ 1,483,389      $ 41,160      $ 1,525,297   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

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

 

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     Six months ended June 30  
     2015     2014  
     (in thousands)  

Cash flows from operating activities

    

Net income

   $ 35,579      $ 113,084   

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

    

Accrual of unearned discounts and amortization of premiums on mortgage-backed securities, mortgage loans at fair value, and asset-backed secured financing

     (119     (537

Capitalization of interest on mortgage loans at fair value

     (20,130     (30,353

Accrual of interest on excess servicing spread

     (9,570     (6,001

Amortization of credit facility commitment fees and debt issuance costs

     5,401        4,879   

Net gain on mortgage loans acquired for sale

     (21,335     (20,193

Accrual of costs related to forward purchase agreements

     —          (168

Net gain on investments

     (26,061     (115,719

Change in fair value, amortization and impairment of mortgage servicing rights

     27,497        20,518   

Results of real estate acquired in settlement of loans

     7,638        11,974   

Share-based compensation expense

     3,685        2,958   

Purchases of mortgage loans acquired for sale at fair value from nonaffiliates

     (20,820,811     (12,345,380

Purchases of mortgage loans acquired for sale at fair value from PennyMac Financial Services, Inc.

     (10,828     (1,985

Repurchases of mortgage loans subject to representation and warranties

     (12,972     (6,621

Sales and repayments of mortgage loans acquired for sale at fair value to nonaffiliates

     5,707,641        4,796,065   

Sales of mortgage loans acquired for sale to PennyMac Financial Services, Inc.

     13,523,345        7,085,859   

Increase in servicing advances

     (8,870     (15,218

(Increase) decrease in due from PennyMac Financial Services, Inc.

     (2,541     2,812   

Increase in other assets

     (24,223     (20,716

Increase (decrease) in accounts payable and accrued liabilities

     8,440        (45,366

(Decrease) increase in payable to PennyMac Financial Services, Inc.

     (7,469     1,036   

(Decrease) increase in income taxes payable

     (14,710     3,283   
  

 

 

   

 

 

 

Net cash used in operating activities

     (1,660,413     (565,789
  

 

 

   

 

 

 

Cash flows from investing activities

    

Net decrease in short-term investments

     107,483        (12,055

Purchases of mortgage-backed securities at fair value

     (25,129     (19,638

Repayments of mortgage-backed securities at fair value

     39,744        5,419   

Purchases of mortgage loans at fair value

     (241,981     (283,017

Sales and repayments of mortgage loans at fair value

     147,465        397,643   

Repayments of mortgage loans under forward purchase agreements at fair value

     —          6,413   

Purchase of excess servicing spread from PennyMac Financial Services, Inc.

     (187,287     (73,393

Repayment of excess servicing spread by PennyMac Financial Services, Inc.

     31,083        16,494   

Settlements of derivative financial instruments

     (10,554     (9,785

Purchase of real estate acquired in settlement of loans

     —          (3,049

Sales of real estate acquired in settlement of loans

     128,097        76,903   

Sales of real estate acquired in settlement of loans under forward purchase agreements

     —          5,365   

Sale of mortgage servicing rights

     376        —     

(Increase) decrease in margin deposits and restricted cash

     (36,003     5,454   
  

 

 

   

 

 

 

Net cash (used) provided by investing activities

     (46,706     112,754   
  

 

 

   

 

 

 

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

 

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     Six months ended June 30,  
     2015     2014  
     (in thousands)  

Cash flows from financing activities

    

Sales of assets under agreement to repurchase

     22,834,050        15,938,914   

Repurchases of assets sold under agreements to repurchase

     (22,062,255     (15,276,762

Sales of mortgage loan participation certificates

     2,440,045        —     

Repayments of mortgage loan participation certificates

     (2,389,653     —     

Issuance of credit risk transfer financing

     649,120        —     

Federal Home Loan Bank advances

     138,400        —     

Advances under note payable

     192,352        —     

Advances under note payable to PennyMac Financial Services, Inc.

     71,072        —     

Repayments under note payable to PennyMac Financial Services, Inc.

     (18,546     —     

Repayments of borrowings under forward purchase agreements

     —          (227,866

Repayments of asset-backed secured financing at fair value

     (11,331     (3,372

Payments of debt issuance cost and commitment fees

     (5,176     (4,711

Issuances of common shares

     8        82,453   

Payments of common share underwriting and offering costs

     —          (1,052

Payments of contingent underwriting fees payable

     (688     (424

Payments of dividends

     (91,967     (43,654
  

 

 

   

 

 

 

Net cash provided financing activities

     1,745,431        463,526   
  

 

 

   

 

 

 

Net decrease in cash

     38,312        10,491   

Cash at beginning of period

     76,386        27,411   
  

 

 

   

 

 

 

Cash at end of period

   $ 114,698      $ 37,902   
  

 

 

   

 

 

 

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

 

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PENNYMAC MORTGAGE INVESTMENT TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1—Organization and Basis of Presentation

PennyMac Mortgage Investment Trust (“PMT” or the “Company”) was organized in Maryland on May 18, 2009, and commenced operations on August 4, 2009, when it completed its initial offerings of common shares of beneficial interest (“common shares”). The Company is a specialty finance company, which, through its subsidiaries (all of which are wholly-owned), invests primarily in residential mortgage loans and mortgage-related assets.

The Company operates in two segments, correspondent production and investment activities:

 

    The correspondent production segment represents the Company’s operations aimed at serving as an intermediary between mortgage lenders and the capital markets by purchasing, pooling and reselling newly originated prime credit quality mortgage loans either directly or in the form of mortgage-backed securities (“MBS”), using the services of PNMAC Capital Management (“PCM” or the “Manager”) and PennyMac Loan Services, LLC (“PLS” or the “Servicer”), both indirect subsidiaries of PennyMac Financial Services, Inc. (“PFSI”).

Most of the mortgage loans the Company has acquired in its correspondent production activities have been eligible for sale to government-sponsored entities such as the Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) or through government agencies such as the Government National Mortgage Association (“Ginnie Mae”). Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an “Agency” and, collectively, as the “Agencies.”

 

    The investment activities segment represents the Company’s investments in mortgage-related assets, which include distressed mortgage loans, real estate acquired in settlement of loans (“REO”), MBS, mortgage servicing rights (“MSRs”) and excess servicing spread (“ESS”). The Company seeks to maximize the fair value of its acquired distressed mortgage loans through proprietary loan modification programs, special servicing or other initiatives focused on keeping borrowers in their homes. Where this is not possible, such as in the case of many nonperforming mortgage loans, the Company seeks to effect property resolution in a timely, orderly and economically efficient manner, including through the use of resolution alternatives to foreclosure.

The Company believes that it qualifies, and has elected to be taxed, as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), beginning with its taxable period ended on December 31, 2009. To maintain its tax status as a REIT, the Company has to distribute at least 90% of its taxable income in the form of qualifying distributions to shareholders.

The Company conducts substantially all of its operations and makes substantially all of its investments through its subsidiary, PennyMac Operating Partnership, L.P. (the “Operating Partnership”), and the Operating Partnership’s subsidiaries. A wholly-owned subsidiary of the Company is the sole general partner, and the Company is the sole limited partner, of the Operating Partnership.

The accompanying consolidated financial statements have been prepared in compliance with accounting principles generally accepted in the United States (“GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification for interim financial information and with the Securities and Exchange Commission’s instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements and notes do not include all of the information required by GAAP for complete financial statements. The interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, income, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2015. Intercompany accounts and transactions have been eliminated.

Preparation of financial statements in compliance with GAAP requires management 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. Actual results will likely differ from those estimates.

 

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Reclassification of previously presented balances

In April of 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 specifies that its adoption be made on a retrospective basis. Accordingly, the Company has reclassified its debt issuance costs from Other assets as previously presented to Mortgage loans sold under agreements to repurchase to conform its December 31, 2014 balance sheet to the current presentation. The adoption of ASU 2015-03 did not result in changes to the Company’s previously presented consolidated statements of income or consolidated statements of cash flows.

Following is a summary of the balance sheet reclassifications:

 

     December 31, 2014  
     As reported      As previously reported      Reclassification  
     (in thousands)  

ASSETS

        

Other assets

   $ 59,155       $ 66,193       $ (7,038

Total assets

   $ 4,897,258       $ 4,904,296       $ (7,038

LIABILITIES

        

Assets sold under agreements to repurchase

   $ 2,729,027       $ 2,730,130       $ (1,103

Mortgage loan participation and sale agreement

     20,222         20,236         (14

Exchangeable senior notes

     244,079         250,000         (5,921
  

 

 

    

 

 

    

 

 

 

Total liabilities

     3,319,086         3,326,124         (7,038

Total liabilities and shareholders’ equity

   $ 4,897,258       $ 4,904,296       $ (7,038
  

 

 

    

 

 

    

 

 

 

Note 2—Concentration of Risks

As discussed in Note 1—Organization and Basis of Presentation above, PMT’s operations and investing activities are centered in mortgage-related assets, a substantial portion of which are distressed at acquisition. Many of the mortgage loans in its targeted asset class are purchased at discounts reflecting their distressed state or perceived higher risk of default, as well as a greater likelihood of collateral documentation deficiencies.

Because of the Company’s investment focus, PMT is exposed, to a greater extent than traditional mortgage investors, to the risks that borrowers may be in economic distress and/or may have become unemployed, bankrupt or otherwise unable or unwilling to make payments when due, and to the effects of fluctuations in the residential real estate market on the performance of its investments. Factors influencing these risks include, but are not limited to:

 

    changes in the overall economy and unemployment rates and residential real estate values in the markets where the properties securing the Company’s mortgage loans are located;

 

    PCM’s ability to identify and the Servicer’s ability to execute optimal resolutions of problem mortgage loans;

 

    the accuracy of valuation information obtained during the Company’s due diligence activities;

 

    PCM’s ability to effectively model, and to develop appropriate model assumptions that properly anticipate, future outcomes;

 

    the level of government support for problem mortgage loan resolution and the effect of current and future proposed and enacted legislative and regulatory changes on the Company’s ability to effect cures or resolutions to distressed mortgage loans; and

 

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    regulatory, judicial and legislative support of the foreclosure process, and the resulting effect on the Company’s ability to acquire and liquidate the real estate securing its portfolio of distressed mortgage loans in a timely manner or at all.

Due to these uncertainties, there can be no assurance that risk management activities identified and executed on PMT’s behalf will prevent significant losses arising from the Company’s investments in real estate-related assets.

A substantial portion of the distressed mortgage loans and REO purchased by the Company in prior years has been acquired from or through one or more subsidiaries of Citigroup Inc. The following tables present purchases for the Company’s investment portfolio of mortgage loans and REO (including purchases under forward purchase agreements), and the portion thereof representing assets purchased from or through one or more subsidiaries of Citigroup Inc.:

 

     Quarter ended June 30,      Six months ended June 30,  
     2015      2014      2015      2014  
     (in thousands)  

Investment portfolio purchases:

           

Mortgage loans

   $ —         $ 27,203       $ 241,981       $ 284,403   

REO

     —           30         —           3,117   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ 27,233       $ 241,981       $ 287,520   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment portfolio purchases above through one or more subsidiaries of Citigroup Inc.:

           

Mortgage loans

   $ —         $ 26,737       $ —         $ 26,737   

REO

     —           30         —           68   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ 26,767       $ —         $ 26,805   
  

 

 

    

 

 

    

 

 

    

 

 

 

Following is a summary of the Company’s holdings of assets purchased through one or more subsidiaries of Citigroup Inc.:

 

     June 30,
2015
     December 31,
2014
 
     (in thousands)  

Mortgage loans at fair value

   $ 882,881       $ 943,163   

REO

     93,171         108,302   
  

 

 

    

 

 

 
   $ 976,052       $ 1,051,465   
  

 

 

    

 

 

 

Total holdings of mortgage loans and REO

   $ 3,055,098       $ 3,030,180   
  

 

 

    

 

 

 

During the year ended December 31, 2013, the Company entered into forward purchase agreements with Citigroup Global Markets Realty Corp. (“CGM”), a subsidiary of Citigroup Inc., to purchase certain nonperforming mortgage loans and REO (collectively, the “CGM Assets”). The CGM Assets were acquired by CGM from unaffiliated money center banks and were held in a trust subsidiary by CGM pending settlement by the Company. The commitment under the forward purchase agreement was settled in full during the quarter ended June 30, 2014.

 

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The Company recognized these assets and related obligations as of the dates of the forward purchase agreements and recognized all subsequent income and changes in value relating to such assets. As a result of recognizing these assets, the Company’s consolidated statements of income and cash flows for the periods presented include the following amounts related to the forward purchase agreements:

 

     Quarter ended
June 30, 2014
     Six months ended
June 30, 2014
 
     (in thousands)  

Statements of income:

     

Interest income

   $ 1,430       $ 3,584   

Interest expense

   $ 783       $ 2,364   

Net gain on investments

   $ 1,743       $ 803   

Net loan servicing fees

   $ 201       $ 517   

Results of REO

   $ (72    $ (473

Statements of cash flows:

     

Repayments of mortgage loans

   $ 1,084       $ 6,413   

Sales of REO

   $ 3,743       $ 5,365   

Repayments of borrowings under forward purchase agreements

   $ (214,742    $ (227,866

The Company has no other variable interests in the trust entity or other exposure to the creditors of the trust entity that could expose the Company to loss.

Note 3—Transactions with Related Parties

Correspondent Production Activities

Following is a summary of correspondent production activity between the Company and PLS:

 

     Quarter ended June 30,      Six months ended June 30,  
     2015      2014      2015      2014  
     (in thousands)  

Fulfillment fee expense earned by PLS

   $ 15,333       $ 12,433       $ 28,199       $ 21,335   

Unpaid principal balance of loans fulfilled by PLS

   $ 3,579,078       $ 2,991,764       $ 6,469,210       $ 4,911,342   

Sourcing fees received from PLS

   $ 2,427       $ 1,125       $ 3,848       $ 2,017   

Unpaid principal balance of loans sold to PLS

   $ 8,082,764       $ 3,748,874       $ 12,818,138       $ 6,722,951   

Purchases of mortgage loans acquired for sale at fair value from PLS

   $ 2,423       $ 1,985       $ 10,828       $ 1,985   

Tax service fees paid to PLS

   $ 1,113       $ 684       $ 2,002       $ 1,050   

At period end:

           

Mortgage loans included in mortgage loans acquired for sale pending sale to PLS

   $ 830,330       $ 304,707         

 

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Mortgage Loan Servicing Activities

Following is a summary of mortgage loan servicing fees earned by PLS:

 

     Quarter ended June 30,      Six months ended June 30,  
     2015      2014      2015      2014  
     (in thousands)  

Mortgage loans acquired for sale at fair value:

           

Base

   $ 42       $ 29       $ 68       $ 46   

Activity-based

     59         51         90         77   
  

 

 

    

 

 

    

 

 

    

 

 

 
     101         80         158         123   
  

 

 

    

 

 

    

 

 

    

 

 

 

Distressed mortgage loans:

           

Base

     4,183         4,975         8,215         9,941   

Activity-based

     3,093         5,746         5,987         12,132   
  

 

 

    

 

 

    

 

 

    

 

 

 
     7,276         10,721         14,202         22,073   
  

 

 

    

 

 

    

 

 

    

 

 

 

MSRs:

           

Base

     4,654         3,323         8,310         6,471   

Activity-based

     105         56         136         104   
  

 

 

    

 

 

    

 

 

    

 

 

 
     4,759         3,379         8,446         6,575   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 12,136       $ 14,180       $ 22,806       $ 28,771   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average investment in:

           

Mortgage loans acquired for sale at fair value

   $ 1,014,883       $ 519,357       $ 887,660       $ 428,941   
  

 

 

    

 

 

    

 

 

    

 

 

 

Distressed mortgage loans

   $ 2,295,807       $ 2,133,587       $ 2,303,080       $ 2,042,362   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average mortgage loans servicing portfolio

   $ 35,742,835       $ 28,230,295       $ 35,215,677       $ 27,417,841   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Investing and Financing Activities

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

 

     Quarter ended June 30,      Six months ended June 30,  
     2015      2014      2015      2014  
     (in thousands)  

Purchases of ESS

   $ 140,875       $ 52,867       $ 187,287       $ 73,393   

Interest income from ESS

   $ 5,818       $ 3,138       $ 9,570       $ 6,001   

Net gain (loss) on ESS

   $ 7,133       $ (10,062    $ (403    $ (14,854

ESS recapture recognized

   $ 1,456       $ 2,525       $ 2,745       $ 4,415   

Repayment of ESS

   $ 18,352       $ 9,081       $ 31,083       $ 16,494   

MSR recapture recognized

   $ —         $ 1       $ —         $ 9   

Advances under note payable to PLS

   $ 71,072       $ —         $ 71,072       $ —     

Repayment of note payable to PLS

   $ 18,546       $ —         $ 18,546       $ —     

Interest income from note payable to PLS

   $ 535       $ —         $ 535       $ —     

On April 30, 2015, PFSI entered into an amendment to a lending facility pursuant to which it may finance certain of its MSRs and servicing advance receivables. Under the terms of the amendment, the maximum loan amount increased from $257 million to $407 million. The $150 million increase was implemented for the purpose of facilitating the financing of excess servicing spread (“ESS”) by the Company. The aggregate loan amount outstanding under the lending facility and relating to advances outstanding with the Company is guaranteed in full by PMT.

In connection with the amendment to the lending facility, the Company and PFSI entered into an underlying loan and security agreement, dated as of April 30, 2015, pursuant to which the Company may borrow up to $150 million from PFSI for the purpose of financing ESS.

The principal amount of the borrowings under the Loan and Security Agreement is based upon a percentage of the market value of the ESS pledged by the Company, subject to the maximum loan amount described above. Pursuant to the underlying loan and security agreement, the Company granted to PFSI a security interest in all of its right, title and interest in, to and under the ESS pledged to secure loans.

The Company and PFSI have agreed that the Company is required to repay PFSI the principal amount of such borrowings plus accrued interest to the date of such repayment, and PFSI is required to repay their lender the corresponding amount under the lending facility. The Company is also required to pay PFSI a fee for the structuring of the lending facility in an amount equal to the portion of the corresponding fee paid by PFSI to their lender under the lending facility and allocable to the increase in the maximum loan amount resulting from the ESS financing. The note matures on October 30, 2015 and interest accrues at a rate based on the lender’s cost of funds.

In connection with the initial public offering of PMT’s common shares (“IPO”) on August 4, 2009, the Company entered into an agreement with PCM pursuant to which the Company agreed to reimburse PCM for the $2.9 million payment that it made to the IPO underwriters if the Company satisfied certain performance measures over a specified period (the “Conditional Reimbursement”). Effective February 1, 2013, the Company amended the terms of the reimbursement agreement to provide for the reimbursement of PCM of the Conditional Reimbursement if the Company is required to pay PCM 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. During the quarter and six months ended June 30, 2015, the Company paid $230,000 and $387,000 to PCM, respectively, compared to $36,000 for the quarter and six months ended June 30, 2014.

The Company has also agreed to pay the IPO underwriters an amount to which it agreed at the time of the offering if the Company satisfies certain performance measures over a specified period. As PCM earns performance incentive fees under the management agreement, such underwriters will be paid at a rate of $20 of payments for every $100 of performance incentive fees earned by PCM. The payment to the underwriters is subject to a maximum reimbursement in any particular 12-month period of $2.0 million and the maximum amount that may be paid under the agreement is $5.9 million. During the quarter and six months ended June 30, 2015, the Company paid $459,000 and 772,000 to the underwriters, respectively, compared to $315,000 and $387,000 for the same periods in 2014.

In the event the termination fee is payable to PCM under the management agreement and PCM and the underwriters have 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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Other Transactions

Following is a summary of the base management and performance incentive fees payable to PCM recorded by the Company:

 

     Quarter ended June 30,      Six months ended June 30,  
     2015      2014      2015      2014  
     (in thousands)  

Base

   $ 5,709       $ 5,838       $ 11,439       $ 11,359   

Performance incentive

     70         3,074         1,343         5,627   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total management fee incurred during the period

   $ 5,779       $ 8,912       $ 12,782       $ 16,986   
  

 

 

    

 

 

    

 

 

    

 

 

 

In the event of termination of the management agreement between the Company and PCM, PCM 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 PFSI, in each case during the 24-month period before termination.

The Company reimburses PCM and its affiliates for other expenses, including common overhead expenses incurred on its behalf by PCM and its affiliates, in accordance with the terms of its management agreement as summarized below:

 

     Quarter ended June 30,      Six months ended June 30,  
     2015      2014      2015      2014  
     (in thousands)  

Reimbursement of:

           

Common overhead incurred by PCM and its affiliates (1)

   $ 2,702       $ 2,691       $ 5,431       $ 5,269   

Expenses incurred on the Company’s behalf

     83         104         462         549   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,785       $ 2,795       $ 5,893       $ 5,818   
  

 

 

    

 

 

    

 

 

    

 

 

 

Payments and settlements during the period (2)

   $ 24,114       $ 14,894       $ 46,866       $ 33,280   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) For the quarter ended June 30, 2015, in accordance with the terms of the management agreement, PCM provided the Company a discretionary waiver of $700,000 of overhead expenses that otherwise would have been allocable to the Company.
(2) Payments and settlements include payments for management fees and correspondent production activities itemized in the preceding tables and netting settlements made pursuant to master netting agreements between the Company and PFSI.

Amounts due to PCM and its affiliates are summarized below:

 

     June 30,      December 31,  
     2015      2014  
     (in thousands)  

Allocated expenses

   $ 5,893       $ 6,582   

Management fees

     5,779         8,426   

Servicing fees

     3,667         3,457   

Conditional Reimbursement

     906         1,136   

Unsettled ESS investment

     —           3,836   

Fulfillment fees

     —           506   
  

 

 

    

 

 

 
   $ 16,245       $ 23,943   
  

 

 

    

 

 

 

Amounts due from PCM and its affiliates totaled $9.3 million and $6.6 million at June 30, 2015 and December 31, 2014, respectively. At June 30, 2015, the balance represents payments receivable relating to cash flows from the Company’s investment in ESS and amounts receivable relating to unsettled ESS recaptures.

PFSI held 75,000 of the Company’s common shares at both June 30, 2015 and December 31, 2014.

Note 4—Earnings Per Share

Basic earnings per share is determined using the two-class method, under which all earnings (distributed and undistributed) are allocated to common shares and participating securities, based on their respective rights to receive dividends. Basic earnings per share is determined by dividing net income, reduced by income attributable to the participating securities, by the weighted-average common shares outstanding during the period.

The Company grants restricted share units which entitle the recipients to receive dividend equivalents during the vesting period on a basis equivalent to the dividends paid to holders of common shares. Unvested share-based compensation awards containing non-forfeitable rights to receive dividends or dividend equivalents (collectively, “dividends”) are classified as “participating securities” and are included in the basic earnings per share calculation using the two-class method.

Diluted earnings per share is determined by dividing net income attributable to diluted shareholders, which adds back to net income the interest expense, net of applicable income taxes, on the Company’s exchangeable senior notes (the “Exchangeable Notes”), by the weighted-average common shares outstanding, assuming all potentially dilutive securities were issued. In periods in which the Company records a loss, potentially dilutive securities are excluded from the diluted loss per share calculation, as their effect on loss per share is anti-dilutive.

 

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The following table summarizes the basic and diluted earnings per share calculations:

 

     Quarter ended June 30,      Six months ended June 30,  
     2015      2014      2015      2014  
     (in thousands except per share amounts)  

Basic earnings per share:

           

Net income

   $ 28,071       $ 75,211       $ 35,579       $ 113,084   

Effect of participating securities—share-based compensation awards

     (438      (433      (1,015      (841
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to common shareholders

   $ 27,633       $ 74,778       $ 34,564       $ 112,243   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average shares outstanding

     74,683         74,065         74,618         72,803   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.37       $ 1.01       $ 0.46       $ 1.54   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share:

           

Net income

   $ 27,633       $ 75,211       $ 34,564       $ 113,084   

Interest on Exchangeable Notes, net of income taxes

     2,121         2,079         —           4,156   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to diluted shareholders

   $ 29,754       $ 77,290       $ 34,564       $ 117,240   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average shares outstanding

     74,683         74,065         74,618         72,803   
  

 

 

    

 

 

    

 

 

    

 

 

 

Potentially dilutive securities:

           

Shares issuable pursuant to exchange of the Exchangeable Notes

     8,467         8,393         —           8,393   

Shares issuable under share-based compensation plan

     330         292         379         338   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted-average number of shares outstanding

     83,480         82,750         74,997         81,535   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 0.36       $ 0.93       $ 0.46       $ 1.44   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends and undistributed earnings allocated to participating securities under the basic and diluted earnings per share calculations require specific shares to be included or excluded that may differ in certain circumstances.

For the six months ended June 30, 2015, approximately 8,467,000 shares issuable pursuant to the exchange feature embedded in the Exchangeable Notes were excluded from the diluted earnings per share calculation as inclusion of the exchange of such shares would have been antidilutive.

Note 5—Loan Sales and Variable Interest Entities

The Company is a variable interest holder in various special purpose entities that relate to its loan transfer and financing activities. These entities are classified as variable interest entities (“VIEs”) for accounting purposes. The Company has segregated its involvement with VIEs between those VIEs which the Company does not consolidate and those VIEs which the Company consolidates.

 

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Unconsolidated VIEs with Continuing Involvement

The following table summarizes cash flows between the Company and transferees in transfers that are accounted for as sales where PMT maintains continuing involvement with the mortgage loans, as well as unpaid principal balance information at period end:

 

     Quarter ended June 30,      Six months ended June 30,  
     2015      2014      2015      2014  
     (in thousands)  

Cash flows:

           

Proceeds from sales

   $ 3,063,397       $ 2,763,138       $ 5,707,641       $ 4,789,444   

Servicing fees received (1)

   $ 22,738       $ 19,019       $ 44,641       $ 34,907   

Period end information:

           

Unpaid principal balance of mortgage loans outstanding

   $ 36,448,945       $ 29,268,039         

Unpaid principal balance of delinquent mortgage loans:

           

30-89 days delinquent

   $ 129,316       $ 90,091         

90 or more days delinquent

           

Not in foreclosure

     28,805         13,325         

In foreclosure or bankruptcy

     20,063         11,306         
  

 

 

    

 

 

       
     48,868         24,631         
  

 

 

    

 

 

       
   $ 178,184       $ 114,722         
  

 

 

    

 

 

       

 

(1) Net of guarantee fees.

Consolidated VIE

On September 30, 2013, the Company completed a securitization transaction in which a wholly-owned VIE issued $537.0 million in certificates backed by fixed-rate prime jumbo mortgage loans of PMT Loan Trust 2013-J1, at a 3.9% weighted yield. The Company retained $366.8 million of those certificates. The Manager concluded that the Company is the primary beneficiary of the VIE and, as a result, the Company consolidates the VIE. Consolidation of the VIE results in the securitized mortgage loans remaining on the consolidated balance sheets of the Company and the certificates issued by the VIE to nonaffiliates being accounted for as a secured financing. The certificates are secured solely by the assets of the VIE and not by any other assets of the Company. The assets of the VIE are the only source of repayment of the certificates.

Note 6—Netting of Financial Instruments

The Company uses derivative financial instruments to manage exposure to interest rate risk created by its MBS, interest rate lock commitments (“IRLCs”), mortgage loans acquired for sale at fair value, mortgage loans at fair value, ESS and MSRs. All derivative financial instruments are recorded on the balance sheet at fair value. The Company has elected to net derivative asset and liability positions, and cash collateral obtained (or posted) by (or to) its counterparties when subject to a legally enforceable master netting arrangement. The derivative financial instruments that are not subject to master netting arrangements are IRLCs. As of June 30, 2015 and December 31, 2014, the Company did not enter into reverse repurchase agreements or securities lending transactions that are required to be disclosed in the following tables.

 

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Offsetting of Derivative Assets

Following is a summary of net derivative assets. As discussed above, all derivatives with the exception of IRLCs are subject to master netting arrangements.

 

     June 30, 2015     December 31, 2014  
                  Net                  Net  
            Gross     amounts            Gross     amounts  
            amounts     of assets            amounts     of assets  
     Gross      offset     presented     Gross      offset     presented  
     amounts      in the     in the     amounts      in the     in the  
     of      consolidated     consolidated     of      consolidated     consolidated  
     recognized      balance     balance     recognized      balance     balance  
     assets      sheet     sheet     assets      sheet     sheet  
     (in thousands)  

Derivatives subject to master netting arrangements:

              

MBS put options

   $ 1,426       $ —        $ 1,426      $ 374       $ —        $ 374   

MBS call options

     169         —          169        —           —          —     

Forward purchase contracts

     2,415         —          2,415        3,775         —          3,775   

Forward sale contracts

     10,844         —          10,844        52         —          52   

Put options on interest rate futures

     1,659         —          1,659        193         —          193   

Call options on interest rate futures

     3,557         —          3,557        3,319         —          3,319   

Treasury futures contracts

     1,210         —          1,210        —           —          —     

Netting

     —           (11,541     (11,541     —           (2,284     (2,284
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     21,280         (11,541     9,739        7,713         (2,284     5,429   

Derivatives not subject to master netting arrangements:

              

Interest rate lock commitments

     4,211         —          4,211        5,678         —          5,678   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
   $ 25,491       $ (11,541   $ 13,950      $ 13,391       $ (2,284   $ 11,107   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Derivative 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.

 

     June 30, 2015      December 31, 2014  
            Gross amounts                    Gross amounts         
            not offset in the                    not offset in the         
            consolidated                    consolidated         
            balance sheet                    balance sheet         
     Net amount                           Net amount                       
     of assets                           of assets                       
     presented                           presented                       
     in the             Cash             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

   $ 4,211       $ —         $ —         $ 4,211       $ 5,678       $ —         $ —         $ 5,678   

RJ O’Brien & Associates, LLC

     4,924         —           —           4,924         3,034         —           —           3,034   

Jefferies Group, LLC

     1,438               1,438         133         —           —           133   

JP Morgan Chase & Co.

     973         —           —           973         —           —           —           —     

Fannie Mae Capital Markets

     712         —           —           712         —           —           —           —     

Daiwa Capital Markets

     78         —           —           78         29         —           —           29   

Credit Suisse First Boston Mortgage Capital LLC

     4         —           —           4         253         —           —           253   

Bank of America, N.A.

     —           —           —           —           738         —           —           738   

Morgan Stanley Bank, N.A.

     —           —           —           —           104         —           —           104   

Other

     1,610         —           —           1,610         1,138         —           —           1,138   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,950       $ —         $ —         $ 13,950       $ 11,107       $ —         $ —         $ 11,107   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Offsetting of Derivative Liabilities and Financial Liabilities

Following is a summary of net derivative liabilities and assets sold under agreements to repurchase. As discussed above, all derivatives with the exception of IRLCs are subject to master netting arrangements. Assets sold under agreements to repurchase do not qualify for setoff accounting.

 

     June 30, 2015     December 31, 2014  
                 Net                 Net  
                 amounts                 amounts  
           Gross amounts     of liabilities           Gross     of liabilities  
     Gross     offset     presented     Gross     amounts offset     presented  
     amounts     in the     in the     amounts     in the     in the  
     of     consolidated     consolidated     of    

consolidated

    consolidated  
     recognized     balance     balance     recognized     balance     balance  
     liabilities     sheet     sheet     liabilities     sheet     sheet  
     (in thousands)  

Derivatives subject to master netting arrangements:

            

Forward purchase contracts

   $ 7,912      $ —        $ 7,912      $ 34      $ —        $ 34   

Forward sales contracts

     4,002        —          4,002        6,649        —          6,649   

Treasury futures contracts

     164        —          164        478        —          478   

Netting

     —          (9,738     (9,738     —          (4,748     (4,748
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     12,078        (9,738     2,340        7,161        (4,748     2,413   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Derivatives not subject to master netting arrangements:

            

Interest rate lock commitments

     4,478        —          4,478        17        —          17   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     16,556        (9,738     6,818        7,178        (4,748     2,430   

Assets sold under agreements to repurchase

            

Amount outstanding

     3,501,925        —          3,501,925        2,729,027        —          2,729,027   

Unamortized issuance costs

     (1,356     —          (1,356     (1,117     —          (1,117
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     3,500,569        —          3,500,569        2,730,144        —          2,730,144   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 3,517,125      $ (9,738   $ 3,507,387      $ 2,737,322      $ (4,748   $ 2,732,575   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Derivative Liabilities, Financial Liabilities and Collateral Pledged by Counterparty

The following table summarizes by significant counterparty the amount of derivative liabilities and assets sold under agreements to repurchase after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance qualifying for netting. All assets sold under agreements to repurchase represent sufficient collateral or exceed the liability amount recorded on the consolidated balance sheet.

 

     June 30, 2015      December 31, 2014  
            Gross amounts                    Gross amounts         
            not offset in the                    not offset in the         
            consolidated                    consolidated         
            balance sheet                    balance sheet         
     Net amount of                          Net amount of                      
     liabilities                          liabilities                      
     presented                          presented                      
     in the                          in the                      
     consolidated            Cash             consolidated            Cash         
     balance      Financial     collateral      Net      balance      Financial     collateral      Net  
     sheet      instruments     pledged      amount      sheet      instruments     pledged      amount  
    

(in thousands)

 

Interest rate lock commitments

   $ 4,478       $ —        $ —         $ 4,478       $ 17       $ —        $ —         $ 17   

Morgan Stanley Bank, N.A.

     273,173         (273,125     —           48         121,975         (121,975     —           —     

Credit Suisse First Boston Mortgage Capital LLC

     858,824         (858,824     —           —           966,155         (966,155     —           —     

Citibank

     1,113,055         (1,113,055     —           —           797,851         (797,663     —           188   

Bank of America, N.A.

     696,438         (696,438     —           —           508,922         (508,922     —           —     

RBS Securities

     —           —          —           —           208,520         (208,520     —           —     

Daiwa Capital Markets

     120,436         (120,436     —           —           126,909         (126,909     —           —     

JPMorgan Chase & Co.

     440,047         (440,047     —           —           —           —          —           —     

Other

     2,292         —          —           2,292         2,225         —          —           2,225   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,508,743       $ (3,501,925   $ —         $ 6,818       $ 2,732,574       $ (2,730,144   $ —         $ 2,430   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Note 7—Fair Value

The Company’s consolidated financial statements include assets and liabilities that are measured based on their fair values. Measurement at fair value may be on a recurring or nonrecurring basis depending on the accounting principles applicable to the specific asset or liability and whether the Manager has elected to carry the item at its fair value as discussed in the following paragraphs.

Fair Value Accounting Elections

The Manager identified all of the Company’s non-cash financial assets and MSRs relating to loans with initial interest rates of more than 4.5%, to be accounted for at fair value. The Manager has elected to account for these financial statement items at fair value so such changes in fair value will be reflected in income as they occur and more timely reflect the results of the Company’s performance. The Manager has also identified the Company’s asset-backed secured financing of the VIE to be accounted for at fair value to reflect the generally offsetting changes in fair value of these borrowings to changes in fair value of mortgage loans at fair value collateralizing this financing.

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% are accounted for at fair value with changes in fair value recorded in current period income.

 

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Table of Contents

For assets sold under agreements to repurchase, borrowings under forward purchase agreements and the Exchangeable Notes, the Manager has determined that historical cost accounting is more appropriate because under this method debt issuance costs are amortized over the term of the debt, thereby matching the debt issuance cost to the periods benefiting from the availability of the debt.

Financial Statement Items Measured at Fair Value on a Recurring Basis

Following is a summary of financial statement items that are measured at fair value on a recurring basis:

 

     June 30, 2015  
     Level 1      Level 2      Level 3      Total  
    

(in thousands)

 

Assets:

           

Short-term investments

   $ 32,417       $ —         $ —         $ 32,417   

Mortgage-backed securities at fair value

     —           287,626         —           287,626   

Mortgage loans acquired for sale at fair value

     —           2,213,874         —           2,213,874   

Mortgage loans at fair value

     —           483,876         2,246,944         2,730,820   

Excess servicing spread purchased from PFSI

     —           —           359,102         359,102   

Derivative assets:

           

Interest rate lock commitments

     —           —           4,211         4,211   

MBS put options

     —           1,426         —           1,426   

MBS call options

     —           169         —           169   

Forward purchase contracts

     —           2,415         —           2,415   

Forward sales contracts

     —           10,844         —           10,844   

Treasury futures contracts

     1,210         —           —           1,210   

Put options on interest rate futures

     1,659         —           —           1,659   

Call options on interest rate futures

     3,557         —           —           3,557   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative assets before netting

     6,426         14,854         4,211         25,491   

Netting (1)

     —           —           —           (11,541
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative assets after netting

     6,426         14,854         4,211         13,950   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage servicing rights at fair value

     —           —           57,343         57,343   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 38,843       $ 3,000,230       $ 2,667,600       $ 5,695,132   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Credit risk transfer financing at fair value

   $ —         $ 649,120       $ —         $ 649,120   

Asset-backed secured financing of the variable interest entity at fair value

     —           151,489         —           151,489   

Derivative liabilities:

           

Interest rate lock commitments

     —           —           4,478         4,478   

Treasury futures

     164         —           —           164   

Forward purchase contracts

     —           7,912         —           7,912   

Forward sales contracts

     —           4,002         —           4,002   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative liabilities before netting

     164         11,914         4,478         16,556   

Netting (1)

     —           —           —           (9,738
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative liabilities after netting

     164         11,914         4,478         6,818   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 164       $ 812,523       $ 4,478       $ 807,427   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

 

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Table of Contents
     December 31, 2014  
     Level 1      Level 2      Level 3      Total  
     (in thousands)  

Assets:

           

Short-term investments

   $ 139,900       $ —         $ —         $ 139,900   

Mortgage-backed securities at fair value

     —           307,363         —           307,363   

Mortgage loans acquired for sale at fair value

     —           637,722         —           637,722   

Mortgage loans at fair value

     —           527,369         2,199,583         2,726,952   

Excess servicing spread purchased from PFSI

     —           —           191,166         191,166   

Derivative assets:

           

Interest rate lock commitments

     —           —           5,678         5,678   

MBS put options

     —           374         —           374   

Forward purchase contracts

     —           3,775         —           3,775   

Forward sales contracts

     —           52         —           52   

Put options on interest rate futures

     193         —           —           193   

Call options on interest rate futures

     3,319         —           —           3,319   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative assets

     3,512         4,201         5,678         13,391   

Netting (1)

     —           —           —           (2,284
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative assets after netting

     3,512         4,201         5,678         11,107   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage servicing rights at fair value

     —           —           57,358         57,358   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 143,412       $ 1,476,655       $ 2,453,785       $ 4,071,568   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Asset-backed secured financing of the variable interest entity at fair value

   $ —         $ 165,920       $ —         $ 165,920   

Derivative liabilities:

           

Interest rate lock commitments

     —           —           17         17   

MBS call options

     478         —           —           478   

Forward purchase contracts

     —           34         —           34   

Forward sales contracts

     —           6,649         —           6,649   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative liabilities

     478         6,683         17         7,178   

Netting (1)

     —           —           —           (4,748
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative liabilities

     478         6,683         17         2,430   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 478       $ 172,603       $ 17       $ 168,350   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

 

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Table of Contents

The following is a summary of changes in items measured using Level 3 inputs on a recurring basis:

 

     Quarter ended June 30, 2015  
     Mortgage     Excess     Interest     Mortgage         
     loans     servicing     rate lock     servicing         
     at fair value     spread     commitments (1)     rights      Total  
     (in thousands)  

Assets:

           

Balance, March 31, 2015

   $ 2,343,382      $ 222,309      $ 8,214      $ 49,448       $ 2,623,353   

Purchases

     —          140,874        —          —           140,874   

Repayments and sales

     (68,190     (18,352     —          —           (86,542

Capitalization of interest

     9,922        —          —          —           9,922   

Accrual of interest

     —          5,819        —          —           5,819   

ESS received pursuant to a recapture agreement with PFSI

     —          1,319        —          —           1,319   

Interest rate lock commitments issued, net

     —          —          11,683        —           11,683   

Servicing received as proceeds from sales of mortgage loans

     —          —          —          1,588         1,588   

Changes in instrument-specific credit risk

     7,489        —          —             7,489   

Other factors

     22,579        7,133        (23,411     6,307         12,608   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
     30,068        7,133        (23,411     6,307         20,097   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Transfers of mortgage loans to REO

     (68,238     —          —          —           (68,238

Transfers of interest rate lock commitments to mortgage loans acquired for sale

     —          —          3,247        —           3,247   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, June 30, 2015

   $ 2,246,944      $ 359,102      $ (267   $ 57,343       $ 2,663,122   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Changes in fair value recognized during the period relating to assets still held at June 30, 2015

   $ 32,807      $ 7,133      $ (267   $ 6,307       $ 45,980   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) For the purpose of this table, the interest rate lock asset and liability positions are shown net.

 

24


Table of Contents
     Quarter ended June 30, 2014  
     Mortgage     Mortgage loans under     Excess     Net interest     Mortgage        
     loans     forward purchase     servicing     rate lock     servicing        
     at fair value     agreements     spread     commitments (1)     rights     Total  
     (in thousands)  

Assets:

            

Balance, March 31, 2014

   $ 2,079,020      $ 202,661      $ 151,019      $ 3,271      $ 36,181      $ 2,472,152   

Purchases

     26,737        466        52,867        —          —          80,070   

Repayments and sales

     (140,807     (1,084     (9,080     —          —          (150,971

Capitalization of interest

     17,042        1,057        —          —          —          18,099   

Accrual of interest

     —          —          3,138        —          —          3,138   

ESS received pursuant to a recapture agreement with PFSI

     —          —          2,362        —          —          2,362   

Interest rate lock commitments issued, net

     —          —          —          19,158        —          19,158   

Servicing received as proceeds from sales of mortgage loans

     —          —          —          —          15,385        15,385   

Changes in fair value included in income arising from:

            

Changes in instrument-specific credit risk

     19,326        1,236        —          —          —          20,562   

Other factors

     52,525        507        (10,062     9,563        (4,764     47,769   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     71,851        1,743        (10,062     9,563        (4,764     68,331   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transfers of mortgage loans under forward purchase agreements to mortgage loans

     201,443        (201,443     —          —          —          —     

Transfers of mortgage loans to REO

     (98,785     —          —          —          —          (98,785

Transfers of mortgage loans under forward purchase agreements to REO under forward purchase agreements

     —          (3,400     —          —          —          (3,400

Transfers of interest rate lock commitments to mortgage loans

     —          —          —          (20,905     —          (20,905
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2014

   $ 2,156,501      $ —        $ 190,244      $ 11,087      $ 46,802      $ 2,404,634   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in fair value recognized during the period relating to assets still held at June 30, 2014

   $ 50,613      $ —        $ (10,062   $ 11,088      $ (4,764   $ 46,875   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) For the purpose of this table, the interest rate lock asset and liability positions are shown net.

 

25


Table of Contents
     Six months ended June 30, 2015  
     Mortgage     Excess     Interest     Mortgage        
     loans     servicing     rate lock     servicing        
     at fair value     spread     commitments (1)     rights     Total  
                 (in thousands)              

Assets:

          

Balance, December 31, 2014

   $ 2,199,583      $ 191,166      $ 5,661      $ 57,358      $ 2,453,768   

Purchases

     241,981        187,287        —          —          429,268   

Repayments and sales

     (114,070     (31,083     —          —          (145,153

Capitalization of interest

     20,130        —          —          —          20,130   

Accrual of interest

     —          9,570        —          —          9,570   

ESS received pursuant to a recapture agreement with PFSI

     —          2,565        —          —          2,565   

Interest rate lock commitments issued, net

     —          —          31,083        —          31,083   

Servicing received as proceeds from sales of mortgage loans

     —          —          —          3,495        3,495   

Changes in instrument-specific credit risk

     19,057        —          —            19,057   

Other factors

     28,196        (403     (23,399     (3,510     884   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     47,253        (403     (23,399     (3,510     19,941   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transfers of mortgage loans to REO

     (147,933     —          —          —          (147,933

Transfers of interest rate lock commitments to mortgage loans acquired for sale

     —          —          (13,612     —          (13,612
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2015

   $ 2,246,944      $ 359,102      $ (267   $ 57,343      $ 2,663,122   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in fair value recognized during the period relating to assets still held at June 30, 2015

   $ 54,574      $ (403   $ (267   $ (3,510   $ 50,394   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) For the purpose of this table, the interest rate lock asset and liability positions are shown net.

 

    Six months ended June 30, 2014  
    Mortgage
loans

at fair value
    Mortgage loans under
forward purchase
agreements
    Excess
servicing
spread
    Net interest
rate lock
commitments (1)
    Mortgage
servicing
rights
    Total  
         

(in thousands)

       

Assets:

           

Balance, December 31, 2013

  $ 2,076,665      $ 218,128      $ 138,723      $ 1,249      $ 26,452      $ 2,461,217   

Purchases

    283,017        1,386        73,393        —          —          357,796   

Repayments and sales

    (387,430     (6,413     (16,494     —          —          (410,337

Capitalization of interest

    28,553        1,801        —          —          —          30,354   

Accrual of interest

    —          —          6,001        —          —          6,001   

ESS received pursuant to a recapture agreement with PFSI

    —          —          3,475        —          —          3,475   

Interest rate lock commitments issued, net

    —          —          —          31,754        —          31,754   

Servicing received as proceeds from sales of mortgage loans

    —          —          —          —          27,142        27,142   

Changes in fair value included in income arising from:

           

Changes in instrument-specific credit risk

    42,629        2,269        —          —            44,898   

Other factors

    70,080        (1,466     (14,854     11,993        (6,792     58,961   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    112,709        803        (14,854     11,993        (6,792     103,859   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transfers of mortgage loans under forward purchase agreements to mortgage loans

    205,902        (205,902     —          —          —          —     

Transfers of mortgage loans to REO

    (162,915     —          —          —          —          (162,915

Transfers of mortgage loans under forward purchase agreements to REO under forward purchase agreements

    —          (9,803     —          —          —          (9,803

Transfers of interest rate lock commitments to mortgage loans acquired for sale

    —          —          —          (33,909     —          (33,909
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2014

  $ 2,156,501      $ —        $ 190,244      $ 11,087      $ 46,802      $ 2,404,634   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in fair value recognized during the period relating to assets still held at June 30, 2014

  $ 73,951      $ —        $ (14,854   $ 11,087      $ (6,792   $ 63,392   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) For purpose of this table, the interest rate lock asset and liability positions are shown net.

 

26


Table of Contents

Following are the fair values and related principal amounts due upon maturity of mortgage loans accounted for under the fair value option (including mortgage loans acquired for sale, mortgage loans at fair value and mortgage loans held in a consolidated VIE):

 

     June 30, 2015  
            Principal         
            amount due         
     Fair value      upon maturity      Difference  
    

(in thousands)

 

Mortgage loans acquired for sale at fair value:

        

Current through 89 days delinquent

   $ 2,212,726       $ 2,123,424       $ 89,302   

90 or more days delinquent (1)

        

Not in foreclosure

     554         547         7   

In foreclosure

     594         689         (95
  

 

 

    

 

 

    

 

 

 
     1,148         1,236         (88
  

 

 

    

 

 

    

 

 

 
     2,213,874         2,124,660         89,214   
  

 

 

    

 

 

    

 

 

 

Other mortgage loans at fair value:

        

Current through 89 days delinquent

     1,239,333         1,495,190         (255,857

90 or more days delinquent (1)

        

Not in foreclosure

     597,859         839,463         (241,604

In foreclosure

     893,628         1,264,333         (370,705
  

 

 

    

 

 

    

 

 

 
     1,491,487         2,103,796         (612,309
  

 

 

    

 

 

    

 

 

 
     2,730,820         3,598,986         (868,166
  

 

 

    

 

 

    

 

 

 
   $ 4,944,694       $ 5,723,646       $ (778,952
  

 

 

    

 

 

    

 

 

 

 

(1) Loans delinquent 90 or more days are placed on nonaccrual status and previously accrued interest is reversed.

 

     December 31, 2014  
            Principal         
            amount due         
     Fair value      upon maturity      Difference  
            (in thousands)         

Mortgage loans acquired for sale:

        

Current through 89 days delinquent

   $ 637,518       $ 610,372       $ 27,146   

90 or more days delinquent (1)

        

Not in foreclosure

     204         255         (51

In foreclosure

     —           —           —     
  

 

 

    

 

 

    

 

 

 
     204         255         (51
  

 

 

    

 

 

    

 

 

 
     637,722         610,627         27,095   
  

 

 

    

 

 

    

 

 

 

Other mortgage loans at fair value:

        

Current through 89 days delinquent

     1,191,635         1,452,885         (261,250

90 or more days delinquent (1)

        

Not in foreclosure

     608,144         875,214         (267,070

In foreclosure

     927,173         1,371,371         (444,198
  

 

 

    

 

 

    

 

 

 
     1,535,317         2,246,585         (711,268
  

 

 

    

 

 

    

 

 

 
     2,726,952         3,699,470         (972,518
  

 

 

    

 

 

    

 

 

 
   $ 3,364,674       $ 4,310,097       $ (945,423
  

 

 

    

 

 

    

 

 

 

 

(1) Loans delinquent 90 or more days are placed on nonaccrual status and previously accrued interest is reversed.

 

27


Table of Contents

Following are the changes in fair value included in current period income by consolidated statement of income line item for financial statement items accounted for under the fair value option:

 

     Quarter ended June 30, 2015  
     Net gain on                          
     mortgage                          
     loans     Net     Net gain     Net loan        
     acquired     interest     on     servicing        
     for sale     income     investments     fees     Total  
    

(in thousands)

 

Assets:

          

Short-term investments

   $ —        $ —        $ —        $ —        $ —     

Mortgage-backed securities at fair value

     —          (23     (6,702     —          (6,725

Mortgage loans acquired for sale at fair value

     (5,017     —          —          —          (5,017

Mortgage loans at fair value

     —          (310     17,990        —          17,680   

Excess servicing spread at fair value

     —          —          8,589        —          8,589   

Mortgage servicing rights at fair value

     —          —          —          6,307        6,307   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ (5,017   $ (333   $ 19,877      $ 6,307      $ 20,834   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

          

Asset-backed secured financing at fair value

   $ —        $ 51      $ 3,991      $ —        $ 4,042   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ —        $ 51      $ 3,991      $ —        $ 4,042   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Quarter ended June 30, 2014  
     Net gain on                          
     mortgage                          
     loans     Net     Net gain     Net loan        
     acquired     interest     on     servicing        
     for sale     income     investments     fees     Total  
    

(in thousands)

 

Assets:

          

Short-term investments

   $ —        $ —        $ —        $ —        $ —     

Mortgage-backed securities at fair value

     —          155        4,081        —          4,236   

Mortgage loans acquired for sale at fair value

     31,202        —          —          —          31,202   

Mortgage loans at fair value

     —          223        88,029        —          88,252   

Mortgage loans under forward purchase agreements at fair value

     —          —          1,743        —          1,743   

Excess servicing spread at fair value

     —          —          (7,537     —          (7,537

Mortgage servicing rights at fair value

     —          —          —          (4,764     (4,764
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 31,202      $ 378      $ 86,316      $ (4,764   $ 113,132   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

          

Asset-backed secured financing at fair value

   $ (5,175   $ (80   $ —        $ —        $ (5,255
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ (5,175   $ (80   $ —        $ —        $ (5,255
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents
     Six months ended June 30, 2015  
     Net gain on
mortgage
loans
    Net     Net gain     Net loan        
     acquired     interest     on     servicing        
     for sale     income     investments     fees     Total  
    

(in thousands)

 

Assets:

          

Short-term investments

   $ —        $ —        $ —        $ —        $ —     

Mortgage-backed securities at fair value

     —          63        (5,186     —          (5,123

Mortgage loans acquired for sale at fair value

     18,064        —          —          —          18,064   

Mortgage loans at fair value

     —          179        36,977        —          37,156   

Mortgage loans under forward purchase agreements at fair value

     —          —          —          —          —     

Excess servicing spread at fair value

     —          —          2,342        —          2,342   

Mortgage servicing rights at fair value

     —          —          —          (3,510     (3,510
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 18,064      $ 242      $ 34,133      $ (3,510   $ 48,929   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

          

Asset-backed secured financing at fair value

   $ —        $ (122   $ 3,222      $ —        $ 3,100   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ —        $ (122   $ 3,222      $ —        $ 3,100   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Six months ended June 30, 2014  
     Net gain on                          
     mortgage                          
     loans     Net     Net gain     Net loan        
     acquired     interest     on     servicing        
     for sale     income     investments     fees     Total  
    

(in thousands)

 

Assets:

          

Short-term investments

   $ —        $ —        $ —        $ —        $ —     

Mortgage-backed securities at fair value

     —          188        6,734        —          6,922   

Mortgage loans acquired for sale at fair value

     49,834        —          —          —          49,834   

Mortgage loans at fair value

     —          553        140,194        —          140,747   

Mortgage loans under forward purchase agreements at fair value

     —          —          803        —          803   

Excess servicing spread at fair value

     —          —          (10,438     —          (10,438

Mortgage servicing rights at fair value

     —          —          —          (6,792     (6,792
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 49,834      $ 741      $ 137,293      $ (6,792   $ 181,076   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

          

Asset-backed secured financing at fair value

   $ (7,954   $ (204   $ —        $ —        $ (8,158
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ (7,954   $ (204   $ —        $ —        $ (8,158
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

Financial Statement Items Measured at Fair Value on a Nonrecurring Basis

Following is a summary of financial statement items that were re-measured at fair value on a nonrecurring basis during the periods presented:

 

     June 30, 2015  
     Level 1      Level 2      Level 3      Total  
     (in thousands)  

Real estate asset acquired in settlement of loans

   $ —         $ —         $ 150,121       $ 150,121   

Mortgage servicing rights at lower of amortized cost or fair value

     —           —           112,363         112,363   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ —         $ 262,484       $ 262,484   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2014  
     Level 1      Level 2      Level 3      Total  
     (in thousands)  

Real estate asset acquired in settlement of loans

   $ —         $ —         $ 157,203       $ 157,203   

Mortgage servicing rights at lower of amortized cost or fair value

     —           —           91,990         91,990   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ —         $ 249,193       $ 249,193   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the fair value changes recognized during the period on assets held at period end that were measured at estimated fair values on a nonrecurring basis:

 

     Quarter ended June 30,      Six months ended June 30,  
     2015      2014      2015      2014  
    

(in thousands)

 

Real estate asset acquired in settlement of loans

   $ (6,491    $ (7,942    $ (13,800    $ (12,525

Mortgage servicing rights at lower of amortized cost or fair value

     7,082         (2,224      703         (2,851
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 591       $ (10,166    $ (13,097    $ (15,376
  

 

 

    

 

 

    

 

 

    

 

 

 

Real Estate Acquired in Settlement of Loans

The Company measures its investment in REO at the respective properties’ fair values less cost to sell on a nonrecurring basis. The initial carrying value of the REO is measured by cost as indicated by the purchase price in the case of purchased REO or as measured by the fair value of the mortgage loan immediately before acquisition in the case of acquisition in settlement of a loan. REO may be subsequently revalued due to the Company receiving greater access to the property, the property being held for an extended period or receiving indications that the property’s value may not be supported by developing market conditions. Any subsequent change in fair value to a level that is less than or equal to the property’s cost is recognized in Results of real estate acquired in settlement of loans in the Company’s consolidated statements of income.

Mortgage Servicing Rights at Lower of Amortized Cost or Fair Value

The Company evaluates its MSRs at lower of amortized cost or fair value for impairment with reference to the assets’ fair value. For purposes of performing its MSR impairment evaluation, the Company stratifies its MSRs at lower of amortized cost or fair value based on the interest rates borne by the mortgage loans underlying the MSRs. Mortgage loans are grouped into pools with 50 basis point interest rate ranges for fixed-rate mortgage loans with interest rates between 3% and 4.5% and a single pool for mortgage loans with interest rates below 3%. MSRs relating to adjustable rate mortgage loans with initial interest rates of 4.5% or less are evaluated in a single pool. If the fair value of MSRs in any of the interest rate pools is below the amortized cost of the MSRs reduced by the existing valuation allowance for that pool, those MSRs are impaired.

 

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When MSRs are impaired, the impairment is recognized in current-period income and the carrying value of the MSRs is adjusted using a valuation allowance. If the fair value of the MSRs subsequently increases, the increase in fair value is recognized in current period income only to the extent of the valuation allowance for the respective impairment stratum.

The Manager 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 the Manager deems recovery of 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.

Fair Value of Financial Instruments Carried at Amortized Cost

The Company’s cash balances as well as certain of its borrowings are carried at amortized cost. Cash is measured using “Level 1” inputs. The Company’s assets sold under agreements to repurchase and mortgage loans participation and sale agreement are classified as “Level 3” financial statement instruments as of June 30, 2015 due to the lack of current market activity and the Company’s reliance on unobservable inputs to estimate these instruments’ fair values.

The Manager has concluded that the fair values of Cash, Assets sold under agreements to repurchase, Mortgage loan participation and sale agreement and Credit Risk Transfer financing at fair value approximate the agreements’ carrying values due to the immediate realizability of cash at its carrying amount and to the borrowing agreements’ short terms and variable interest rates.

The Exchangeable Notes are carried at amortized cost. The fair value of the Exchangeable Notes at June 30, 2015 and December 31, 2014 was $233.0 million and $239.0 million, respectively. The fair value of the Exchangeable Notes is estimated using a broker indication of value. The Company has classified the Exchangeable Notes as “Level 3” financial statement items as of June 30, 2015 due to the lack of current market activity and use of a broker’s indication of value to estimate the instrument’s fair value.

Valuation Techniques and Inputs

Most of the Company’s assets and asset-backed financing agreements are carried at fair value with changes in fair value recognized in current period income. A substantial portion of these items are “Level 3” financial statement items 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 assumptions 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, the Manager has assigned the responsibility for estimating fair value of these items to specialized staff and subjects the valuation process to significant executive management oversight. The Manager’s Financial Analysis and Valuation group (the “FAV group”) is responsible for estimating the fair values of “Level 3” financial statement items other than IRLCs and maintaining its valuation policies and procedures.

With respect to the Level 3 valuations, the FAV group reports to the Manager’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, including the models’ performance versus actual results, and reports those results to the Manager’s senior management valuation committee. The Manager’s senior management valuation committee includes PFSI’s chief executive, financial, operating, credit and asset/liability management officers.

The FAV group is responsible for reporting to the Manager’s senior management valuation committee on a monthly basis on the changes in the valuation of the portfolio, 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 Manager 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 submitted to the Manager’s senior management secondary marketing working group. The Manager’s secondary marketing working group includes PFSI’s chief executive, operating, institutional mortgage banking, capital markets, asset/liability, portfolio risk, and capital markets operations officers.

 

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The following is a description of the techniques and inputs used in estimating the fair values of “Level 2” and “Level 3” financial statement items:

Mortgage-Backed Securities

The Company’s MBS include Agency and senior non-agency MBS. The Company categorized its MBS as “Level 2” financial statement items. Fair value of Agency and senior non-Agency MBS is estimated based on quoted market prices for the Company’s MBS or similar securities.

Mortgage Loans

Fair value of mortgage loans is estimated based on whether the mortgage loans are saleable into active markets:

 

    Mortgage loans that are saleable into active markets, comprised of the Company’s mortgage loans acquired for sale at fair value and mortgage loans at fair value held in a VIE, are categorized as “Level 2” financial statement items. The fair values of mortgage loans acquired for sale at fair value are estimated using their quoted market or contracted price or market price equivalent. For the mortgage loans at fair value held in a VIE, the fair values of all of the individual securities issued by the securitization trust are used to derive a fair value for the mortgage loans. The Company obtains indications of fair value from nonaffiliated brokers based on comparable securities and validates brokers’ indications of fair value using pricing models and inputs the Manager believes are similar to the models and inputs used by other market participants.

 

    Loans that are not saleable into active markets, comprised of the Company’s mortgage loans at fair value held outside the VIE and mortgage loans under forward purchase agreements at fair value, are categorized as “Level 3” financial statement items and their fair values are estimated using a discounted cash flow approach. Inputs to the discounted cash flow model include current interest rates, loan amount, payment status, property type or contracted selling price, discount rates and forecasts of future interest rates, home prices, prepayment speeds, default speeds and loss severities.

The valuation process includes the computation by stratum of the mortgage loans’ fair values and a review for reasonableness of various measures such as weighted average life, projected prepayment and default speeds, and projected default and loss percentages. The FAV group computes the effect on the valuation of changes in input variables such as interest rates, home prices, and delinquency status to assess the reasonableness of changes in the loan valuation.

The results of the estimates of fair value of “Level 3” mortgage loans are reported to the Manager’s valuation committee as part of its review and approval of monthly valuation results.

Changes in fair value attributable to changes in instrument-specific credit risk are measured by the effect on fair value of the change in the respective loan’s delinquency status and history at period-end from the later of the beginning of the period or acquisition date.

The significant unobservable inputs used in the fair value measurement of the Company’s mortgage loans at fair value are discount rate, 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.

 

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Following is a quantitative summary of key inputs used in the valuation of mortgage loans at fair value:

 

Key inputs

   June 30, 2015    December 31, 2014

Discount rate

     

Range

   2.3% – 15.0%    2.3% – 15.0%

Weighted average

   7.2%    7.7%

Twelve-month projected housing price index change

     

Range

   1.9% – 5.2%    4.0% – 5.3%

Weighted average

   3.9%    4.8%

Prepayment speed (1)

     

Range

   0.1% – 5.1%    0.0% – 6.5%

Weighted average

   3.6%    3.1%

Total prepayment speed (2)

     

Range

   3.6% – 29.6%    0.0% – 27.9%

Weighted average

   20.9%    21.6%

 

(1) Prepayment speed is measured using Life Voluntary Conditional Prepayment Rate (“CPR”).
(2) Total prepayment speed is measured using Life Total CPR.

Excess Servicing Spread Purchased from PennyMac Financial Services, Inc.

The Company categorizes ESS as a “Level 3” financial statement item. The Company uses a discounted cash flow approach to estimate the fair value of ESS. The key inputs used in the estimation of the fair value of ESS include prepayment speed and discount rate. Significant changes to those inputs in isolation may result in a significant change in the ESS fair value measurement. Changes in these key inputs are not necessarily directly related.

ESS is generally subject to loss in fair value when interest rates decrease. Decreasing mortgage rates normally encourage increased mortgage refinancing activity. Increased refinancing activity reduces the life of the mortgage loans underlying the ESS, thereby reducing the fair value of ESS. Reductions in the fair value of ESS affect income primarily through change in fair value.

Interest income for ESS is accrued using the interest method, based upon the expected interest yield from the ESS through the expected life of the underlying mortgages. Changes to expected interest yield result in a change in Interest income on the Company’s consolidated statements of income. Changes to other inputs result in a change to fair value that is recognized in Net gain (loss) on investments on the Company’s consolidated statements of income.

 

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Following are the key inputs used in determining the fair value of ESS:

 

    

Range

     (Weighted average)

Key inputs

   June 30, 2015    December 31, 2014

Unpaid principal balance of underlying mortgage loans (in thousands)

   $46,809,508    $28,227,340

Average servicing fee rate (in basis points)

   32    31

Average ESS rate (in basis points)

   16    16

Pricing spread (1)

     

Range

   1.7% – 12.4%    1.7% – 12.0%

Weighted average

   5.0%    5.3%

Life (in years)

     

Range

   0.3 – 7.3    0.4 – 7.3

Weighted average

   6.2    5.8

Annual total prepayment speed (2)

     

Range

   7.6% – 74.3%    7.6% – 74.6%

Weighted average

   9.7%    11.2%

 

(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 London Interbank Offered Rate (“LIBOR”) curve for purposes of discounting cash flows relating to ESS.
(2) Prepayment speed is measured using Life Total CPR.

Derivative Financial Instruments

The Company categorizes IRLCs as a “Level 3” financial statement item. The Company estimates the fair value of IRLCs based on quoted Agency MBS prices, its estimate of the fair value of the MSRs it expects to receive in the sale of the mortgage loans and the probability that the mortgage loan will be purchased as a percentage of the commitments it has made (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 and the MSR component of the IRLCs, in isolation, may result in a significant change in fair value. The financial effects of changes in these inputs are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the MSR component of IRLC value, but increase the pull-through rate for loans that have decreased in fair value.

 

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Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:

 

Key inputs

   June 30, 2015    December 31, 2014

Pull-through rate

     

Range

   63.6% – 99.9%    65.0% – 98.0%

Weighted average

   93.7%    94.9%

MSR value expressed as:

     

Servicing fee multiple

     

Range

   1.4 – 5.2    0.7 – 5.2

Weighted average

   4.4    4.3

Percentage of unpaid principal balance

     

Range

   0.3% – 3.7%    0.2% – 1.3%

Weighted average

   1.1%    1.1%

The Company estimates the fair value of commitments to sell loans based on quoted MBS prices. The Company estimates the fair value of the interest rate options and futures it purchases and sells based on observed interest rate volatilities in the MBS market. These derivative financial instruments are categorized by the Company as “Level 2” financial statement items.

Real Estate Acquired in Settlement of Loans

REO is measured based on its fair value on a nonrecurring basis and is categorized as a “Level 3” financial statement item. Fair value of REO is established by using a current estimate of fair value from a broker’s price opinion or a full appraisal, or the price given in a current contract of sale.

REO fair values are reviewed by the Manager’s staff appraisers when the Company obtains multiple indications of fair value and there is a significant difference between the fair values received. PCM’s staff appraisers will attempt to resolve the difference between the indications of fair value. In circumstances where the appraisers are not able to generate adequate data to support a fair value conclusion, the staff appraisers will order an additional appraisal to determine the fair value.

Mortgage Servicing Rights

MSRs are categorized as “Level 3” financial statement items. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The key inputs used in the Company’s discounted cash flow model are based on market factors which the Manager believes are consistent with inputs and data used by market participants valuing similar MSRs. The key inputs used in the estimation of the fair value of MSRs include prepayment and default rates of the underlying loans, the applicable pricing spread or discount rate, and annual per-loan cost to service mortgage loans, all of which are unobservable. Significant changes to any of those inputs in isolation could result in a significant change in the MSR fair value measurement. Changes in these key inputs are not necessarily directly related.

MSRs are generally subject to loss in fair value when mortgage interest rates decrease. Decreasing mortgage interest rates normally encourage increased mortgage refinancing activity. Increased refinancing activity reduces the life of the mortgage loans underlying the MSRs, thereby reducing MSR fair value. Reductions in the fair value of MSRs affect income primarily through change in fair value and impairment charges. For MSRs backed by mortgage loans with historically low interest rates, factors other than interest rates (such as housing price changes) take on increasing influence on prepayment behavior of the underlying mortgage loans.

 

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Following are the key inputs used in determining the fair value of MSRs at the time of initial recognition:

 

     Quarter ended June 30,  
     2015      2014  
     Amortized      Fair      Amortized      Fair  
     cost      value      cost      value  
     (MSR recognized and unpaid principal balance of underlying loan amounts in
thousands)
 

MSR and pool characteristics:

  

MSR recognized

   $ 30,587       $ 1,589       $ 13,356       $ 15,385   

Unpaid principal balance of underlying mortgage loans

   $ 3,346,010       $ 176,404       $ 1,244,538       $ 1,458,400   

Weighted-average annual servicing fee rate (in basis points)

     25         25         25         25   

Key inputs:

           

Pricing spread (1)

           

Range

     6.5% – 13.0%         9.0% – 16.3%         6.3% – 14.3%         8.5% – 10.3%   

Weighted average

     8.1%         10.1%         8.7%         9.1%   

Life (in years)

           

Range

     2.6 – 7.3         2.3 – 7.3         1.3 – 7.3         3.2 – 7.3   

Weighted average

     6.7         6.8         6.1         7.1   

Annual total prepayment speed (2)

           

Range

     7.6% – 28.6%         8.3% – 34.2%         7.6% – 50.9%         8.1% – 25.4%   

Weighted average

     8.3%         10.6%         10.4%         9.6%   

Annual per-loan cost of servicing

           

Range

     $62 – $62         $62 – $62         $68 – $100         $68 – $68   

Weighted average

     $62         $62         $68         $68   
     Six months ended June 30,  
     2015      2014  
     Amortized      Fair      Amortized      Fair  
     cost      value      cost      value  
     (MSR recognized and unpaid principal balance of underlying loan amounts in
thousands)
 

MSR and pool characteristics:

  

MSR recognized

   $ 56,141       $ 3,495       $ 22,474       $ 27,142   

Unpaid principal balance of underlying mortgage loans

   $ 5,628,766       $ 400,057       $ 2,095,087       $ 2,550,114   

Weighted-average annual servicing fee rate (in basis points)

     26         26         25         25   

Key inputs:

           

Pricing spread (1)

           

Range

     6.5% – 17.5%         9.0% – 16.3%         6.3% – 14.3%         8.5% – 12.3%   

Weighted average

     8.3%         10.6%         8.6%         9.0%   

Life (in years)

           

Range

     1.3 – 7.7         2.3 – 7.3         1.1 – 7.3         2.8 – 7.3   

Weighted average

     6.6         6.3         6.0         7.1   

Annual total prepayment speed (2)

           

Range

     7.6% – 51.0%         8.3% – 34.2%         7.6% – 56.4%         8.0% – 25.4%   

Weighted average

     8.7%         12.3%         10.4%         9.5%   

Annual per-loan cost of servicing

           

Range

     $62 – $134         $62 – $62         $68 – $100         $68 – $68   

Weighted average

     $63         $62         $68         $68   

 

(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 MSRs acquired as proceeds from the sale of mortgage loans.
(2) Prepayment speed is measured using Life Total CPR.

 

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Following is a quantitative summary of key inputs used in the valuation of MSRs as of the dates presented, and the effect on the fair value from adverse changes in those inputs:

 

                 June 30, 2015                 December 31, 2014  
     Amortized     Fair     Amortized     Fair  
     cost     value     cost     value  
    

(Carrying value, unpaid principal balance and effect

on fair value amounts in thousands)

 

MSR and pool characteristics:

  

Carrying value

   $ 337,394      $ 57,343      $ 300,422      $ 57,358   
        

Unpaid principal balance of underlying mortgage loans

   $ 30,687,534      $ 5,761,411      $ 28,006,797      $ 6,278,676   

Weighted-average annual servicing fee rate (in basis points)

     26        25        26        25   

Weighted-average note interest rate

     3.81     4.77     3.80     4.78

Key inputs:

        

Pricing spread (1) (2)

        

Range

     6.3% – 17.5%        7.8% – 16.3%        6.3% – 17.5%        8.1% – 16.3%   

Weighted average

     7.6%        9.7%        7.9%        10.3%   

Effect on fair value of a:

        

5% adverse change

     $(6,593)        $(992)        $(5,801)        $(937)   

10% adverse change

     $(12,968)        $(1,951)        $(11,410)        $(1,845)   

20% adverse change

     $(25,098)        $(3,779)        $(22,086)        $(3,577)   

Weighted average life (in years)

        

Range

     1.7 – 7.3        2.2 – 7.3        1.8 – 7.2        1.8 – 7.2   

Weighted average

     6.4        6.9        6.4        6.7   

Prepayment speed (1) (3)

        

Range

     7.6% – 38.3%        8.0% – 31.4%        7.8% – 47.9%        8.0% – 39.6%   

Weighted average

     8.4%        10.1%        8.8%        11.4%   

Effect on fair value of a:

        

5% adverse change

     $(6,824)        $(1,350)        $(6,166)        $(1,430)   

10% adverse change

     $(13,437)        $(2,652)        $(12,138)        $(2,803)   

20% adverse change

     $(26,066)        $(5,116)        $(23,532)        $(5,394)   

Annual per-loan cost of servicing

        

Range

     $62 – $134        $62 – $134        $62 – $134        $62 – $134   

Weighted average

     $62        $62        $62        $62   

Effect on fair value of a:

        

5% adverse change

     $(2,063)        $(356)        $(1,807)        $(334)   

10% adverse change

     $(4,127)        $(711)        $(3,614)        $(668)   

20% adverse change

     $(8,253)        $(1,422)        $(7,228)        $(1,337)   

 

(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 impairment recognized will depend on the relationship of fair value to the carrying value of MSRs.
(2) Pricing spread represents a margin that is added 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 MSRs.
(3) Prepayment speed is measured using Life Total CPR.

 

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The preceding sensitivity analyses are limited in that they were performed at a particular point in time; only contemplate the movements in the indicated inputs; do not incorporate changes in the inputs in relation to other inputs; are subject to the accuracy of various models and inputs used; and do not incorporate other factors that would affect the Company’s overall financial performance in such scenarios, including operational adjustments made by the Manager to account for changing circumstances. For these reasons, the preceding estimates should not be viewed as earnings forecasts.

Securities Sold Under Agreements to Repurchase

Fair value of securities sold under agreements to repurchase is based on the accrued cost of the agreements, which approximates the fair values of the agreements, due to the short maturities of such agreements.

Note 8—Mortgage Loans Acquired for Sale at Fair Value

Mortgage loans acquired for sale at fair value is comprised of recently originated mortgage loans purchased by the Company for resale. Following is a summary of the distribution of the Company’s mortgage loans acquired for sale at fair value:

 

     June 30, 2015      December 31, 2014  
            Unpaid             Unpaid  
     Fair      principal      Fair      principal  
     value      balance      value      balance  
Loan type   

(in thousands)

 

Conventional:

           

Agency-eligible (1)

   $ 1,331,950       $ 1,279,712       $ 290,007       $ 277,355   

Jumbo

     51,594         50,976         138,390         135,008   

Acquired for sale to PennyMac Loan Services, LLC — Government insured or guaranteed

     830,330         793,972         209,325         198,265   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,213,874       $ 2,124,660       $ 637,722       $ 610,628   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage loans pledged to secure assets sold under agreements to repurchase

   $ 1,422,166          $ 609,608      
  

 

 

       

 

 

    

Mortgage loans pledged to secure mortgage loan participation and sale agreements

   $ 72,819          $ 20,862      
  

 

 

       

 

 

    

Mortgage loans pledged to secure credit risk transfer financing

   $ 656,377          $ —        
  

 

 

       

 

 

    

Mortgage loans pledged to secure Federal Home Loan Bank (“FHLB”) advances

   $ 48,627          $ —        
  

 

 

       

 

 

    

 

(1) Includes mortgage loans pooled under credit risk transfer financing with a fair value of $656.4 million.

The Company is not approved by Ginnie Mae as an issuer of Ginnie Mae-guaranteed securities which are backed by government-insured or guaranteed mortgage loans. The Company transfers government-insured or guaranteed mortgage loans that it purchases from correspondent lenders to PLS, which is a Ginnie Mae-approved issuer, and earns a sourcing fee of three basis points on the unpaid principal balance plus interest earned during the period it holds each such mortgage loan.

Note 9—Derivative Financial Instruments

The Company engages in interest rate risk management activities in an effort to reduce the variability of earnings caused by changes in interest rates. To manage the price risk resulting from interest rate risk, the Company uses 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 the Company’s MBS, IRLCs and inventory of mortgage loans acquired for sale. The Company records all derivative financial instruments at fair value and records changes in fair value in current period income.

The Company is exposed to price risk relative to its mortgage loans acquired for sale as well as to the IRLCs it issues to correspondent lenders. The Company bears price risk from the time an IRLC is issued to a correspondent lender to the time the purchased mortgage loan is sold. The Company is exposed to loss if mortgage interest rates increase, because the value of the purchase commitment or mortgage loan acquired for sale decreases.

 

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The Company is also exposed to risk relative to the fair value of its MSRs. The Company is exposed to loss in fair value of its MSRs when interest rates decrease. The Company includes MSRs in its hedging activities.

The Company enters into Eurodollar futures contracts, which settle daily, to economically hedge net fair value changes of MBS at fair value and the related variable rate repurchase agreement liabilities indexed to LIBOR and a portion of fixed-rate mortgage loans at fair value held by its consolidated VIE. The Company uses the Eurodollar futures with the intention of moderating the risk of changing market interest rates that will result in unfavorable changes in the value of the Company’s fixed-rate assets and economic performance of its LIBOR-indexed variable interest rate repurchase agreement liabilities.

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 mortgage loans acquired for sale.

The Company had the following derivative assets and liabilities and related margin deposits recorded within Derivative assets and Derivative liabilities on the consolidated balance sheets:

 

     June 30, 2015     December 31, 2014  
            Fair value            Fair value  
     Notional      Derivative     Derivative     Notional      Derivative     Derivative  

Instrument

   amount      assets     liabilities     amount      assets     liabilities  
                  (in thousands)               

Derivatives not designated as hedging instruments:

              

Free-standing derivatives:

              

Interest rate lock commitments

     1,503,814       $ 4,211      $ 4,478        695,488       $ 5,678      $ 17   

Forward sales contracts

     3,252,286         10,844        4,002        1,601,282         52        6,649   

Forward purchase contracts

     2,263,622         2,415        7,912        1,100,700         3,775        34   

MBS put options

     367,500         1,426        —          340,000         374        —     

MBS call options

     40,000         169        —          —           —          —     

Eurodollar future sale contracts

     5,984,000         —          —          7,426,000         —          —     

Eurodollar future purchase contracts

     —           —          —          800,000         —          —     

Treasury future contracts

     40,000         1,210        164        85,000         —          478   

Call options on interest rate futures

     1,135,000         3,557        —          1,030,000         3,319        —     

Put options on interest rate futures

     1,273,000         1,659        —          275,000         193        —     
     

 

 

   

 

 

      

 

 

   

 

 

 

Total derivative instruments before netting

        25,491        16,556           13,391        7,178   

Netting

        (11,541     (9,738        (2,284     (4,748
     

 

 

   

 

 

      

 

 

   

 

 

 
      $ 13,950      $ 6,818         $ 11,107      $ 2,430   
     

 

 

   

 

 

      

 

 

   

 

 

 

Margin deposits with (collateral received from) derivatives counterparties

      $ (1,803        $ 2,465     
     

 

 

        

 

 

   

The following tables summarize the notional amount activity for derivative contracts used to hedge the Company’s IRLCs, inventory of mortgage loans acquired for sale, MSRs, mortgage loans at fair value held in a VIE and MBS.

 

39


Table of Contents
     Quarter ended June 30, 2015  
     Balance,                    Balance,  
     beginning             Dispositions/      end  

Instrument

   of period      Additions      expirations      of period  
    

(in thousands)

 

Forward sales contracts

     2,958,492         14,047,534         (13,753,740      3,252,286   

Forward purchase contracts

     2,132,616         9,885,504         (9,754,498      2,263,622   

MBS put options

     190,000         587,500         (410,000      367,500   

MBS call options

     —           140,000         (100,000      40,000   

Eurodollar future sale contracts

     6,355,000         185,000         (556,000      5,984,000   

Treasury future contracts

     85,000         65,000         (110,000      40,000   

Call option on interest rate futures

     1,165,000         1,635,000         (1,665,000      1,135,000   

Put options on interest rate futures

     1,020,000         1,548,000         (1,295,000      1,273,000   
     Quarter ended June 30, 2014  
     Balance,                    Balance,  
     beginning             Dispositions/      end  

Instrument

   of period      Additions      expirations      of period  
    

(in thousands)

 

Forward purchase contracts

     1,777,353         12,037,081         (10,755,830      3,058,604   

Forward sales contracts

     2,497,960         15,317,583         (13,629,910      4,185,633   

MBS put options

     260,000         412,500         (280,000      392,500   

MBS call options

     35,000         95,000         (35,000      95,000   

Eurodollar future sale contracts

     6,084,000         336,000         (858,000      5,562,000   

Eurodollar future purchase contracts

     —           400,000         (400,000      —     

Treasury future sale contracts

     75,000         117,000         (107,000      85,000   

Treasury future purchase contracts

     380,000         125,000         (380,000      125,000   

Put options on interest rate futures

     90,000         230,000         (90,000      230,000   
     Six months ended June 30, 2015  
     Balance,                    Balance,  
     beginning             Dispositions/      end  

Instrument

   of period      Additions      expirations      of period  
    

(in thousands)

 

Forward sales contracts

     1,601,283         23,877,061         (22,226,058      3,252,286   

Forward purchase contracts

     1,100,700         16,933,180         (15,770,258      2,263,622   

MBS put options

     340,000         992,500         (965,000      367,500   

MBS call options

     —           140,000         (100,000      40,000   

Eurodollar future sale contracts

     7,426,000         285,000         (1,727,000      5,984,000   

Eurodollar future purchase contracts

     800,000         —           (800,000      —     

Treasury future contracts

     85,000         161,500         (206,500      40,000   

Call options on interest rate futures

     1,030,000         2,275,000         (2,170,000      1,135,000   

Put options on interest rate futures

     275,000         2,668,000         (1,670,000      1,273,000   

 

40


Table of Contents
     Six months ended June 30, 2014  
     Balance,                    Balance,  
     beginning             Dispositions/      end  

Instrument

   of period      Additions      expirations      of period  
    

(in thousands)

 

Forward purchase contracts

     2,781,066         18,434,899         (18,157,361      3,058,604   

Forward sales contracts

     3,588,027         23,986,522         (23,388,917      4,185,633   

MBS put option

     55,000         842,500         (505,000      392,500   

MBS call option

     110,000         155,000         (170,000      95,000   

Eurodollar future sale contracts

     8,779,000         462,000         (3,679,000      5,562,000   

Eurodollar future purchase contracts

     —           2,997,000         (2,997,000      —     

Treasury future sale contracts

     105,000         220,800         (240,800      85,000   

Treasury future purchase contracts

     52,500         562,000         (489,500      125,000   

Put options on interest rate futures

     —           380,000         (150,000      230,000   

Following are the net gains (losses) recognized by the Company on derivative financial instruments and the income statement line items where such gains and losses are included:

 

          Quarter ended June 30,     Six months ended June 30,  

Hedged Item

   Income statement line    2015     2014     2015     2014  
         

(in thousands)

 

Interest rate lock commitments and mortgage loans acquired for sale

   Net gain on mortgage loans
acquired for sale
   $ 25,566      $ (28,802   $ 10,456      $ (39,501

Mortgage servicing rights

   Net loan servicing fees    $ (16,272   $ 4,286      $ (5,196   $ 4,186   

Fixed-rate assets and LIBOR-indexed repurchase agreements

   Net gain on investments    $ (1,256   $ 8,191      $ (11,294   $ (13,802

Note 10—Mortgage Loans at Fair Value

Following is a summary of the distribution of the Company’s mortgage loans at fair value:

 

     June 30, 2015      December 31, 2014  
            Unpaid             Unpaid  
     Fair  <